Sometimes it can be difficult to know why a stock is falling as growth in sales and profits doesn’t always translate into a rising share price. A lot of the time, the reason has to do with rates of change.
So it is with Amazon (NASDAQ:AMZN). Despite sales in the last three months of 2024 being 10% higher than the previous year, the stock fell in extended trading last night (6 February).
Outlook
There’s nothing intrinsically wrong with a 10% revenue increase. But it’s slower than the growth rate from earlier this year – and the outlook for the first quarter of 2025 is lower again.
Amazon expects net sales to grow between 5% and 9%. Adjusting for currency fluctuations and the fact that 2024 was a leap year, this translates to between 8.5% and 11.7%.
Furthermore, operating profits are likely to be largely in line with the previous year. That’s not hugely impressive for a stock trading at around 51 times (net) income.
Part of this is due to Amazon’s ongoing investment in artificial intelligence (AI) infrastructure. Investors are going to have to hope this brings the kind of returns the company is anticipating.
Long-term
Amazon’s share price might be slipping, but I don’t see any threat to its competitive position. Its two biggest assets – its AWS cloud business and its e-commerce platform – look resilient to me.
The firm’s marketplace provides the fastest, cheapest, and most convenient e-commerce platform around. On top of this, the company is able to add Prime subscriptions and advertising sales.
The latest update reports subscription revenue up 10% and 18% growth in advertising sales. And then there’s AWS, where sales increased 19% during the quarter.
The cloud division is a key part of Amazon’s operations. It makes up 17% of sales, but over 50% of profits and it subsidises other parts of the company, allowing them to keep customer prices down.
Risks
In my view, the biggest threat to Amazon isn’t the risk of its operations being disrupted by a competitor. It’s the chance of structural changes to its business coming from legal challenges.
Investors should remember that there’s an ongoing case against the firm from the Federal Trade Commission (FTC). The claim is the company operates a monopoly and maintains this status illegally.
There are a couple of ways in which the case might turn out to be unproblematic. It could ultimately come to nothing, or it could result in a fine that isn’t a significant problem for Amazon.
The company could, however, be required to change its business practises or divest some of its operations. This can’t be ruled out and remains the biggest threat to the organisation.
Still a top stock?
The market’s reaction to Amazon’s latest results looks reasonable to me. Sales are slowing and the guidance for the next quarter’s profits isn’t particularly strong.
From a long-term perspective, though, I still think the stock looks very attractive. So if the share price continues to fall, I’m going to look to add to my existing investment in the company.
