Amazon is ‘hunting three big whales in its retail business’: analyst

Amazon’s (AMZN) stock has had a rough 12 months. While the S&P 500 has gained as much as 24% and Microsoft (MSFT) has jumped 48%, Amazon’s stock has risen just 4%. But at least one analyst believes the stock is set for a rebound in the second half of 2022.

“This is a company that faced a lot of inflation and supply chain risks in the back half of the last year,” Evercore ISI’s Mark Mahaney told Yahoo Finance Live.

“I think all of those will be absorbed into the business model or [comparisons] against, and that’s what allows, in the back half of the year, revenue growth to accelerate, margins to expand, and the stock to take off.”

Those include investments in ever faster delivery programs, taking on the competition in grocery delivery, and ramping up sales of business supplies.

“I refer to the company as hunting three big whales in the retail business,” Mahaney said. “I think they can unlock more revenue growth for Amazon, and I think that’s under-appreciated in the stock.”

Amazon experienced sharp revenue growth in the early days of the pandemic due to more people shopping online to avoid potential COVID exposure. But the explosive growth in Amazon’s sales, combined with a need to invest more in its delivery and logistics infrastructure has put a strain on the company’s net income.

In Q3 2020, Amazon reported net income, which is the company’s income minus taxes and expenses, of $6.3 billion. In Q3 2021, however, net income was just $3.2 billion. This drop came even though Amazon made more in sales in Q3 2021, $54.9 billion, than in 2020, $52.8 billion.

Amazon is ‘hunting three big whales in its retail business’: analyst

Amazon CEO Andy Jassy. (Photo by Bruce Bennett/Getty Images)

When the sort of super excess demand related to COVID and online retail started to abate last year, you saw how much they were spending,” Mahaney said. “Amazon has increased its distribution capacity, all of its fulfillment centers, etc., it’s increased by I think as much in the last few years as Walmart (WMT) has in its entire history. There is a massive investment cycle going on at Amazon.”

Amazon is expected to announce even more expenditures in its upcoming Q4 earnings report. In a statement released as part of Amazon’s Q3 report in October, newly minted CEO Andy Jassy said the company will continue to spend heavily.

“In the fourth quarter, we expect to incur several billion dollars of additional costs in our Consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season,” Jassy said.

“It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.”

But Amazon has other levers that it can pull to push its stock price higher, Mahaney told Yahoo Finance. Specifically, it can dive deeper into ultra-fast delivery, grocery, and business supplies.

Faster delivery, Mahaney predicts, will result in more people signing up for Amazon’s Prime service. And since Prime subscribers tend to spend more on Amazon, that will invariably help increase Amazon’s bottom line.

Grocery delivery is another major opportunity point for Amazon, as it battles it out with the likes of Walmart and Instacart for control of the space. Finally, Mahaney says Amazon could see a benefit from its business supplies business.

Amazon has yet to announce the date of its Q4 earnings release, though it’ll likely come sometime in February. We’ll find out more about the company’s latest expenditures, and its strategy moving forward then.

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