November 2, 2021 8:00 AM
 — 
3
 min

Difficult period for Amazon

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The world's largest online retailer Amazon.com posted weaker-than-expected net profit and revenue in the third quarter amid unprecedented global supply chain challenges and labor shortages. Amazon's quarterly revenue increased 15% year-on-year to $ 110.8 billion, which was below the market forecast of $ 111.55 billion. Net income in July-September fell 50% to $ 3.16 billion from $ 6.33 billion for the same period a year earlier, which was the largest drop since the second quarter of 2017. Earnings per share fell to $ 6.12 from $ 12.37 and was well below market expectations of $ 8.9.

TIKR:
AMZN

PRICE:
$3300

TARGET PRICE:
$4300

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30%

S&P 500
4,597(-0.18%)

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83,08(-0.15%)

10Y UST
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$61,607(+1.48%)

As reported in a press release, the complex operating environment contributed to the growth of Amazon's third-quarter cost of sales by 10% yoy to $ 62.93 billion, and order processing and shipping costs - by 26% yoy to $ 18.5 billion. We believe that higher operating costs will also affect the company's performance in the fourth quarter, which is the pre-Christmas sales season amid labor shortages, higher labor costs, global supply chain problems, and higher shipping costs. According to Amazon's forecast, in the fourth quarter, the company's total revenue will increase by 4-12% compared to the same period last year to $ 130-140 billion. The market consensus suggests an increase in the indicator to the level of $ 142.17 billion.

It is worth noting that the deterioration in financial performance affected only Amazon's e-commerce business, while sales of Amazon Web Services' cloud service jumped 39% year-on-year to $ 16.11 billion. Amazon's swelling disappointed investors, which contributed to the drop in quotations shares. We believe that the company will experience short-term difficulties over a 3-6 month horizon, therefore we maintain a positive long-term attitude towards the business and our target value at $ 4,300 per share.

Among the main growth drivers for Amazon's business, which should ensure stable revenue growth over the next few years, we highlight the following: 1). Further increase in the company's global market share in the B2C e-commerce segment. 2). Active business development in other e-commerce segments such as B2B. 3). Significant opportunities in existing and new international markets such as India, Mexico and Australia. 4). Significant growth in AWS Cloud segment revenue averaged 25% per year over 2021–2026 driven by increased business process migration to the cloud. 5). Development of the AMZN Advertising platform, which will drive revenue and profit growth in the future.

Amazon.com primarily comprises a global retail e-Commerce business, as well as Amazon Web Services cloud provider and Whole Foods grocery stores. The company offers programs that enable sellers to sell their products on its websites and their own branded websites and to fulfill orders through them, and programs that allow authors, musicians, filmmakers, app developers, and others to publish and sell content. Amazon operates in three segments: North America, International, and AWS. The company designs its websites to enable millions of products to be sold by the company and by third parties across dozens of product categories. Customers access its websites directly and through its mobile websites and apps. It also manufactures and sells hardware devices including Echo, Fire, and Kindle, among others.

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