Better profit margin days ahead?

Inflationary pressures (including wage increases and higher transportation costs) and a tight labor market continued to weigh on Amazon (NASDAQ: AMZN) profit margin. For context, inflationary pressures, productivity losses and disruption to its operations led to a more than $4 billion increase in costs in the fourth quarter.

Meanwhile, increased investment in growth initiatives, including expanding execution capacity, remained a drag.

Now what?

During the fourth quarter conference call, Amazon chief financial officer Brian Olsavsky said these cost issues will likely persist into the first quarter, negatively impacting its profitability. However, Olsavsky sees things improving. Additionally, to mitigate higher costs, Amazon will increase the price of its Prime subscription from $119 per year to $139 per year.

Echoing similar sentiments, Jefferies’ Brent Thill expects Amazon’s operating profit and margins to improve on “efficiency as CAPEX moderates and US Prime fees increase”.

Amazon has invested heavily to double its processing capacity over the past two years. However, Olsavsky said capital spending on execution capability will moderate and “will likely now match growth in our underlying business.”

Thill expects this will boost Amazon’s free cash flow and drive operational efficiency as more of Amazon’s fulfillment centers would operate at scale.

It’s also worth noting that Amazon’s high-margin AWS (Amazon Web Services) business is seeing accelerated growth, which is positive. Emphasizing the same, Thill said Amazon’s fourth quarter marked the “4th consecutive acceleration in AWS sales growth and with backlog growth accelerating to 61% (from 48%) and indicating new momentum for AMZN’s most profitable (and valuable) business.”

The analyst raised his earnings estimate for 2022 and retained a buy rating on AMZN stock.

Along with Thill, Morgan Stanley analyst Brian Nowak expects Amazon’s profitability to improve in 2022 and be boosted by rising Prime prices.

The Taking of Wall Street

Wall Street is bullish on AMZN’s outlook as most of its challenges are temporary and will likely dissipate soon. Additionally, AWS’s accelerating revenue growth is encouraging. Amazon stock received 32 Buy recommendations for a Strong Buy consensus rating.

Additionally, AMZN’s stock price predictions on TipRanks show significant upside potential. Amazon’s average price target of $4,192.97 implies 36.8% upside potential from current levels.

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