Elaborated in this short Twitter thread.
Over time, Amazon focused on growth, relentlessly reinvesting profits into ever-expanding infrastructure, innovation, and improvements. It's stock price doesn't always adequately reflect the company's power and true potential to make money - markets will, at times, price in positive future growth when overall socio-economic conditions favour Amazon, or put pressure on the stock when it's facing headwinds.
Amazon was, indeed, one of the biggest beneficiaries of the Covid-impacted economy. As the company kept operations running, analysts' and market's expectations were high, there was no end in sight to the pandemic and the stock priced in a lot of future growth, reflected in the summer 2020 boom. Some would argue it was divorced from fundamentals. Amazon continued to grow, despite global supply chain issues, rising inflation and depressed labour conditions - more or less keeping business as usual in terms of its growth. However, the stock price stagnated, as it became more and more apparent that further upside is limited by these new headwinds, and consecutive earnings reports confirmed the issues.
When a company's price stagnates as it grows and expands its infrastructure, strengthens supply chains and operations, the ratio between stock price and effective value of the company drops. For Amazon, since it's never been obsessed about earnings, but more so about customers, P/E will always be high since the business keeps margins low, despite huge revenues. However, even here, P/E dropped while parameters like FCF remained optimistic. Now, we're at a point where guidance and expectations are extremely low, but the forward looking socio-economic picture shifts - inflation is slowing down, labour market conditions are easing, and it very well may be that dismal projections that Amazon have made for themselves are not going to be that terrible at all. So, now, we may be looking for surprises to the upside, in a company whose stock price remained flat for a year, but a company that has reinvested billions of dollars into its various aspects. With AWS, Ads, and other high-margin business showing no signs of a slowdown, returned strength in retail when the world seems to be exiting the global pandemic, may mean that another re-pricing of the stock may happen over the following two quarters.
Historically, these boom & bust cycles were apparent for Amazon, over the past decade. Exhuberance, followed by consolidation. Coincidentally, these cycles seem to repeat every two years, or so. A year of consolidation is almost over, and our next cycle is - boom!
Over time, Amazon focused on growth, relentlessly reinvesting profits into ever-expanding infrastructure, innovation, and improvements. It's stock price doesn't always adequately reflect the company's power and true potential to make money - markets will, at times, price in positive future growth when overall socio-economic conditions favour Amazon, or put pressure on the stock when it's facing headwinds.
Amazon was, indeed, one of the biggest beneficiaries of the Covid-impacted economy. As the company kept operations running, analysts' and market's expectations were high, there was no end in sight to the pandemic and the stock priced in a lot of future growth, reflected in the summer 2020 boom. Some would argue it was divorced from fundamentals. Amazon continued to grow, despite global supply chain issues, rising inflation and depressed labour conditions - more or less keeping business as usual in terms of its growth. However, the stock price stagnated, as it became more and more apparent that further upside is limited by these new headwinds, and consecutive earnings reports confirmed the issues.
When a company's price stagnates as it grows and expands its infrastructure, strengthens supply chains and operations, the ratio between stock price and effective value of the company drops. For Amazon, since it's never been obsessed about earnings, but more so about customers, P/E will always be high since the business keeps margins low, despite huge revenues. However, even here, P/E dropped while parameters like FCF remained optimistic. Now, we're at a point where guidance and expectations are extremely low, but the forward looking socio-economic picture shifts - inflation is slowing down, labour market conditions are easing, and it very well may be that dismal projections that Amazon have made for themselves are not going to be that terrible at all. So, now, we may be looking for surprises to the upside, in a company whose stock price remained flat for a year, but a company that has reinvested billions of dollars into its various aspects. With AWS, Ads, and other high-margin business showing no signs of a slowdown, returned strength in retail when the world seems to be exiting the global pandemic, may mean that another re-pricing of the stock may happen over the following two quarters.
Historically, these boom & bust cycles were apparent for Amazon, over the past decade. Exhuberance, followed by consolidation. Coincidentally, these cycles seem to repeat every two years, or so. A year of consolidation is almost over, and our next cycle is - boom!