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Is the Amazon share price undervalued?

Amazon share price: Amazon warehouse

The Amazon [AMZN] share price has been on a surprising downward trend since posting earnings that fell short of sales expectations. Despite posting revenue of more than $100bn for the third quarter in a row, shares in the big tech giant have dipped to a price that could be an attractive entry based on its future growth potential. 

Amazon share price’s August pullback

The Amazon share price has had a bit of a wobble since its second quarter 2021 earnings report, released on 29 July, falling close to 8% in the past month to 27 August (though it recently recovered). The stock was down 8% from its all-time high of $3,773.08, set on 13 July, as of the close on 31 August. 

The company’s second quarter sales miss should come as no surprise. As Brian Olsavsky, CFO of Amazon, explained in the earnings call, the coronavirus crisis has made year-on-year projections extremely difficult. 

Revenue for the second quarter of 2021 was up 27%, whereas the previous four quarters had seen a growth rate of between 37% and 44%. Although recent revenue growth remains above the pre-pandemic rate of 21%, Olsavsky expects the rate to slow over the next few quarters. 

“As we move forward and start to comp Covid-19’s impact on our revenue growth, we encourage you to also look at the multi-year compound annual growth rate (CAGR) since the onset of the pandemic to better put this growth in perspective,” Olsavsky said on the earnings call. 

Cloud a reason to be bullish

The highlight from the second-quarter earnings was arguably the fact that Amazon Web Services (AWS) continued to rebound. After three quarters of stagnating growth of 28% to 32% — the lowest levels from AWS since 2013 — the segment’s sales increased by 37% in the second quarter, the highest growth rate since the second quarter of 2019.

With AWS expected to maintain its upwards trend, Ben Howard, managing director and portfolio manager at Alpha Squared Capital, believes there is room for significant margin expansion, even as Amazon further ramps up investment. 

AWS’s operating margin for the second quarter was 28.3%, higher than any other segment. Howard projects a CAGR of 32.34% from 2020 to 2025 versus a CAGR of 19.58% in the same period for the online store segment. 

Writing in Seeking Alpha, Howard argued that the Amazon share price is currently relatively cheap for this reason. He points out that the stock has not always been affordable, however, “based on my forecasts and predictions, I do believe this may be an advantageous time to add Amazon at a relatively discounted valuation”.

E-commerce overhang and the threat of inflation 

While online stores remain Amazon’s biggest segment by sales, its share of overall revenue has gradually been declining.

The coronavirus crisis saw demand for e-commerce skyrocket last year, but this has since cooled off. And though the US Federal Reserve is expected to get going on tapering in September, it will have to take an aggressive approach to prevent inflation. The latter’s ongoing threat could be a near-term headwind for consumer spending.

With this in mind, Nelson Capital Management doesn’t take an outright bearish view on Amazon but instead takes a not-so-bullish call. “We reduced our position in Amazon following its stellar performance through the pandemic. Though we believe online shopping is here to stay, we think some portion of consumer wallet share will transition to services and experiences,” wrote the investment firm in its Q2 2021 investor letter, seen by The Street. 

Whether the current level of the Amazon share price presents an attractive buying opportunity could in part depend on the e-commerce thesis and whether any inflation rate rise curtails consumer spending.

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