Amazon (NASDAQ:AMZN) completed its first stock split since 1999 last week, giving shareholders 20 shares for each share of Amazon they previously owned. Since the completion of the stock split, however, shares of Amazon have declined approximately 14%. I believe the current setup is not favorable and with interest rates now increasing more rapidly than previously expected, Amazon may be set for a major revaluation to the downside!
Stock split didn’t have a positive effect on Amazon’s stock performance and you can blame the Fed
The Fed raised interest rates 75 basis points this week, handing the market the largest interest rate increase in 28 years. The increase in interest rates to between 1.50% and 1.75% is a big deal for the corporate sector and consumers alike as it will affect most consumer and business loans. The Fed is looking to do more to fight inflation, but additional rate increases also increase recession risks.
Amazon’s stock split, at least so far, was not a big success for shareholders… with shares declining about 14% since June 6. Stock splits may boost short-term returns for shareholders, but Amazon’s stock split has so far failed to lure investors back into the stock. Year to date, shares of Amazon are down 36% and risks are only growing.
Higher interest rates and USD strength are risks for Amazon’s international business
Amazon generated $477.7B in net sales over the last twelve months, of which about 60% were generated in North America. Approximately 26% of revenues come from Amazon’s international e-Commerce business while 14% of revenues were contributed by Amazon’s rapidly growing Amazon Web Services business. The problem that I see with Amazon’s international e-Commerce operations is the current USD strength which makes it harder for U.S. businesses to compete. The USD has appreciated against major currencies in 2022 and is almost at parity with the EUR, in part because of expectations about aggressive interest rate increases in the United States in 2022 and 2023. The Fed yesterday said that it expects interest rates to go to 3.4% by the end of 2022 and then to 3.8% in 2023.
Unfortunately for companies like Amazon, which achieve a large percentage of revenues in currencies other than USD, the appreciation of the USD represents a serious revenue problem going forward and it could cause shares to revalue even lower.
The international business was the fastest-growing business for Amazon in 2021, with revenues growing almost twice as fast as Amazon Web Services grew its top line. In Q1’22, however, the stronger USD already affected Amazon’s financial results in material ways, resulting in a negative net sales impact of $1.8B. Amazon’s international net sales, as shown below, decreased 6% year over year in the first-quarter, chiefly due to unfavorable currency developments.
Operating income risks are growing
Amazon Web Services has been a bright spot for Amazon in the last year, with growth surging at a time when the e-Commerce business, both in the U.S. and internationally, showed signs of a post-COVID normalization. In the first-quarter, only Amazon Web Services made a positive operating income contribution of $6.5B while Amazon’s U.S. and international operations together made a $2.8B loss. In Q1’22, Amazon’s operating income declined 60% year over year to $3.7B, currency-adjusted, with international operating income dropping off a massive 196% year over year to $(1.3B).
Going forward, I see additional revenue risks originating from a continual slowdown in e-Commerce sales, including third-party sales, on the Amazon platform should a recession strike. Continual USD strength may also translate to weaker USD profits for Amazon.
Amazon has additional downside
E-Commerce companies, facing drastically lowered growth expectations post-COVID, may still be considered expensive. Amazon’s growth is also expected to moderate materially in the coming years and estimates currently don’t even account for additional USD strength and recession impacts. Amazon is expected to grow revenues between 12-17% annually over the next five years but growth rates could be significantly lower if a U.S. recession further spoils Amazon’s business results. Based off of revenues for FY 2023, shares of Amazon have a P-S ratio of 1.8 X.
Historically, Amazon has sold at much higher valuation factors…
Risks with Amazon
Amazon is facing a double-whammy: A recession-induced slowdown in sales on the Amazon platform could spoil the growth outlook while an even stronger USD would also eat up billions of dollars in net sales. While Amazon Web Services is likely going to do well due to favorable adoption trends in the industry, Amazon’s period of hyper-growth is coming rapidly to an end. For the stock, this could mean even more trouble than it already went through. Slowing top line growth and declining profitability, especially in Amazon’s international business, are serious problems for Amazon’s shares going forward.
Now that Amazon completed its stock split, investors are likely to return their attention to Amazon’s platform performance, especially in the e-Commerce business which has failed to make positive operating income contributions as of late. While the stock split has lowered Amazon’s stock price — which may make the stock more accessible — I believe Amazon’s shares are currently not a buy due to expected currency headwinds and growing operating income risks related to Amazon’s international operations. Amazon Web Services is a bright spot for Amazon, but cloud performance may not be enough to save Amazon’s results in a recession that simultaneously sees high inflation as well as a strong USD!