AMZN Stock Is Harnessing Secular Trends but Its Financials Are Mixed

Amazon (NASDAQ:AMZN) is benefiting from a secular trend in e-commerce and the public cloud. These on-going changes in technology, social life, and business are geared towards becoming more efficient, supporting cloud adoption, and increasing eCommerce penetration. These trends should be a boon to Amazon for the foreseeable future but the future of AMZN stock is more murky.

The company’s mixed fourth quarter 2021 earnings will weigh in the performance of AMZN stock now as investors rush to dump risky assets amid geopolitical risks.

However, they will also try to get bargains in beaten-down equities. As of March 1, shares of Amazon had a year-to-date drop of nearly 9%. Investors who have bought and kept their Amazon shares for a year have now a return of approximately -2%. This is not a huge loss, but it is not any gain either after a strong 2021 for the U.S. stock market. But bullish investors will suggest Amazon is shaping the future of e-commerce it is a stock to keep for the long term. Is it so?

I have plenty of doubts that I will elaborate on in this article.

Q4 2021 Financial Results: Mixed Results

Amazon in its latest earnings report announced earnings per share (EPS) generally accepted accounting principles (GAAP) of $27.75 a beat by $24.01 and revenue of $137.41 billion, a miss by -$173.16 million.

Some of the Q4 2021 highlights included a 9% year-over-year (YoY) increase of net sales to $137.4 billion, a decrease of operating income to $3.5 billion in the fourth quarter, compared with $6.9 billion in Q4 2020, and an increase of net income to $14.3 billion versus $7.2 billion in the same quarter a year ago.

I consider the drop in operating income an important risk to monitor over the next quarters.

Turning to full-year results of 2021 the positive news first included an increase of 22%, for net sales to $469.8 billion, operating income increased to $24.9 billion or 8.7%, and net income increased to $33.4 billion or 56.80%. So, are all things great with these financial results? If you answer yes, then you should know that a quick and unjustified answer is not always the ideal one, especially when it comes to crunching financial numbers.

The Bad News for AMZN Stock

The bad news for shares of Amazon is that the internet retail giant for the full year of 2021 announced an outflow of $14.3 billion related to its free cash flow (FCF). In 2020 there was an inflow of $21.4 billion.

Also note that: “Operating cash flow decreased 30% to $46.3 billion for the trailing twelve months, compared with $66.1 billion for the trailing twelve months ended December 31, 2020.”

Operating cash flow is a very important measure of the cash a business generates from its normal business operations. Amazon invests to expand its fulfillment centers and to pursue other strategic goals but operating cash flow has been in decline for the past three consecutive quarters.

Amazon also has a negative trend related to its “Free Cash Flow Less Equipment Finance Leases and Principal Repayments of all other Finance Leases and Financing Obligations” which has declined for the past four consecutive quarters, a trend that started back in the first quarter of 2021.

Free cash flow is used for valuation purposes. Amazon, I must admit, has done something quite smart to calm investors, it has announced it implemented its first buyback in 10 years. Buybacks are positive for valuation reasons.

Amazon’s Key Risks Now

The Covid-19 pandemic and fluctuations in foreign exchange rates are not the only risks for Amazon now. Inflation and labor market shortages are common risks for many businesses. I would add the recent Russian invasion of Ukraine as a top risk now. Should Russia ban U.S. companies from operating in its territory then Amazon would take a big hit.

I also question the rationale behind the company’s large investment in Rivian Automotive (NASDAQ:RIVN). Shares of the electric vehicle (EV) maker have crashed nearly 41% in 2022 and this will be reflected in the next quarterly results of Amazon.

AMZN Stock Does Not Seem Cheap

AMZN stock is relatively expensive based on its price to earnings ratio (46.2x) compared to the U.S. Online Retail industry average (22x). Its price to earnings to growth (PEG) ratio (2.1x) and its price-to-book (PB) ratio (11.1x) compared to the U.S. Online Retail industry average (2.4x) also support there is a risk premium that is not negligible.

I predict that large institutional investors would rush to buy shares of Amazon if a global sell-off in equities continues amid the geopolitical crisis in Ukraine. This decision comes with considerable risks.

On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.

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