Amazon's Q3 results missed on both the top and bottom lines, driving shares down some 5% in the few trading sessions that followed earnings day. Amazon stock (AMZN) - Get Amazon.com, Inc. Report has struggled to build momentum since Q2, in fact, despite it being one of the most highly rated mega cap names by Wall Street analysts.
Today, we explain why Q4 may not be the catalyst that puts an end to this cycle of malaise in share price. Buying AMZN for the long haul, without short-term expectations, seems to be a better plan.
(Read more from the Amazon Maven: Amazon Stock: Venmo Deal Could Be Bullish Development)
The bar is still high
Last year was an unexpectedly strong year for Amazon. The pandemic accelerated trends that favored online sales, cloud, and digital services. While the brick-and-mortar channel struggled, the market expected the e-commerce honeymoon to last even after COVID restrictions eased.
As it turned out, Amazon has been having a hard time keeping up in 2021, as evidenced by the company’s Q2 and Q3 performance. Don’t expect the upcoming holiday quarter to look much better for growth, since the season was particularly strong in 2020 – total Amazon revenues had climbed by a multi-year record 44% back then – and the supply chain crisis is near a peak.
Pressure on cash flow
Global commerce has been facing supply disruptions that impact availability and price of raw materials and labor. Amazon has been facing challenges to meet demand, and doing it well has cost the Seattle-based company quite a bit more than many anticipated.
CFO Brian Olsavsky has added some color through Q4 guidance, estimating that Amazon should incur double the expenses in the coming period.
“We estimate the cost of labor, labor-related productivity losses and cost inflation to have added approximately $2 billion in operating cost in Q3, particularly in August and September. Our Q4 guidance range anticipates that these costs will approach $4 billion in Q4 as we see a full quarter’s impact of these effects and a higher seasonal unit volume.”
AMZN might not be for the short term
To be clear, the Amazon Maven is not at all bearish on Amazon. Top Wall Street analysts seem to agree: all 29 of them covered by TipRanks see AMZN as a buy or strong buy, with an average price target of $4,095.50 and 18% upside potential.
However, we believe such returns are at high risk of not materializing in the near term – say, the next few weeks or couple of months. As Nasdaq contributor Patrick Sanders has said, “it’s more likely that Amazon will continue its up-and-down ride, at least until the supply chain issues improve and the pandemic effects fade away.”
Four months later, Amazon stock is still down 6% from the peak. When do you think is a good time to buy the stock?
Is the price right?
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(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 The Amazon Maven)