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Amazon
Stocks sank on Friday after first-quarter earnings disappointed investors and a second-quarter outlook left Wall Street soured. But there is reason for optimism: strength in the high-growth areas of the company’s business.
Shares of the tech giant fell 8.7% in premarket trading to $2,640.95, with Amazon (ticker: AMZN) on track to move into a bear market, down more than 20% this year.
Amazon’s operating income was $3.7 billion for the quarter, near the lower end of the company’s $3 billion to $6 billion target range and well below the $5.3 billion expected among surveyed analysts. by FactSet.
“Amazon’s update was concerning as it not only put the company to its first quarterly loss since 2015, but also painted a bleak picture for the broader retail market,” said Russ Mould, an analyst at broker AJ Bell.
Wall Street seized on Amazon’s perspective as a proxy for the trouble ahead. The company projects operating income of between a loss of $1 billion and a profit of $3 billion in the second quarter on sales in the range of $116 billion to $121 billion. Not what analysts expected: Previous estimates were for operating income of $6.8 billion on sales of more than $125 billion.
“While Amazon’s outlook is somewhat bleak, it’s important to remember that other parts of its business are firing on all cylinders, namely the advertising part and the cloud computing part,” Mold said.
And you’re right.
Revenue in Amazon’s advertising business, which the company first disclosed in its latest quarterly earnings revealing was bigger than YouTube, rose 23% year over year to $7.9 billion. While it was below the $8.2 billion expected by analysts, and below the $9.7 billion last quarter, it still represents progress.
It gets even better in the cloud, where Amazon Web Services posted revenue of $18.4 billion in the quarter, up 37% year-over-year and some $100 million above estimates. Amazon’s cloud computing business is playing a significant role in the company’s overall profits, and market participants expect it to continue.
“While Amazon’s overall revenue growth has slowed, its cloud business continues to grow at an impressive rate, and that can’t be ignored,” said Robert Schein, chief investment officer at wealth manager Blanke Schein. “We continue to believe that the cloud space is the most important business segment within Amazon.”
Brian Vendig, president of wealth manager MJP Wealth Advisors, echoed the optimism about technologies that companies like Amazon have staked their futures on.
“The future of mega-cap tech stocks remains strong because the underlying technologies that these companies are involved in are not going to go away,” Vendig said.
But tech companies like Amazon face a turbulent near-term outlook, even as Wall Street remains bullish on the stock, and the median price target among analysts implies an upside of more than 45%.
The Federal Reserve is expected to raise interest rates many times this year and next as it battles historically high inflation by driving up the cost of borrowing. That will cause bond yields to rise, putting pressure on valuations by lowering the “equity risk premium,” or the amount of extra return an investor should expect to get from stocks.
“In the short term, the market is worried about valuations, which makes it difficult to be buyers of large-cap tech stocks at current prices,” Vendig said.
Email Jack Denton at [email protected]
Reference-www.barrons.com