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Amazon E-commerce: More Losses Ahead

Despite the e-commerce juggernaut's most recent results, Wall Street analysts still remain optimistic for a turnaround this year. Their prayers might take a little longer to be heard.

Amazon  (AMZN) - Get Amazon.com Inc. Report has been suffering from multiple factors. The inflationary environment has been pressuring the company’s margins, leading to its first bottom-line loss in almost seven years. Since supply chains are most likely far from a full recovery, the stock is poised for further losses.

Still, Wall Street’s top firms hold an overweighting recommendation on AMZN: analysts expect the company’s retail arm (online and physical stores, plus third-party sellers) to present double-digit growth throughout the second half of the year, as the company also recovers to a 4-5% operating margin.

Here is why it might be too soon to expect such a turnaround.

Figure 1: Amazon E-commerce: More Losses Ahead

Figure 1: Amazon E-commerce: More Losses Ahead

(Read more from Amazon Maven: Amazon Stock After the Split: Still Time to Buy?)

Fewer Visitors Coming for the Virtual Display

Just as we can relate the revenues generated by shopping mall stores to the fullness of the parking lot, online marketplaces’ sales can be predicted by the online traffic directed to their websites.

The bad news is, according to Jefferies’ Brent Thill, the online traffic to Amazon.com was 6% lower in both April and May, compared to last year. “A substantial slowdown,” he stated, considering the 15% web traffic growth the company had in 2020 (even though those figures were raised by the COVID lockdowns).

If it makes things any better (or at least not so gloomy), Amazon isn't the only e-commerce company suffering from fewer visitors. Walmart  (WMT) - Get Walmart Inc. Report and Target  (TGT) - Get Target Corporation Report are also seeing traffic declines.

According to Thill, the culprits for this slowdown include “a return to in person shopping, difficult comps, and a shift in consumption to other discretionary spending buckets (e.g., travel and dining).

In the end, Amazon isn't losing its market share, but is suffering from the whole e-commerce market shrinking. In this case, the Seattle-based behemoth wouldn’t be able to completely avoid the losses, but it should make sure to bleed less than its opponents.

Wall Street: Too Nice to Amazon

According to the Wall Street Journal’s Dan Gallagher, Amazon's stock would be better off without the top investment firms’ overoptimism. The company’s CEO, Andy Jassy, has already been facing significant headwinds that are not going away anytime soon, and “high targets from Wall Street don’t make things any easier,” Gallagher wrote.

The business reporter justified his thesis by taking into account the Seattle-based titan’s most recent steps. The company is working to sublease about 10 million square feet of excess warehouse space, and is also putting off the construction of some of its new facilities and renegotiating some of its warehouse leases.

Those are not good signs, considering that Amazon's investments into physical space during the pandemic was partially responsible for depleting its cash flow.

However, it gets worse. As Gallagher noted, the “23-year Amazon vet Dave Clark, who ran the company’s retail and logistics operations, presented a three-year turnaround plan for those divisions to Amazon’s board on May 25 — just days before he resigned from the company.”

Our Take

From our perspective, Amazon seems to have recognized its investments throughout the pandemic might have been exaggerated, and now the company is trying to trim its losses. However, losing one of its veteran executives days just after he presented his own turnaround plan could mean issues might be worse than analysts are anticipating.

As a result, the consequences will be severe. According to Thill, Amazon’s operating income could stay “muted” throughout 2022, as the company remains vulnerable to a combination of wage inflation and the fact that Amazon nearly doubled its headcount during the pandemic.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Amazon Maven)