By Michael Elkins
Oppenheimer reiterated an Outperform rating on Amazon.com, Inc. (NASDAQ:AMZN) but reduced their price target on the stock to $125.00 (From $135.00) after conducting a deep dive into the company's expenses. Following the investigation, the analysts believe that the online retailer more layoffs are necessary for eCommerce to become meaningfully profitable.
The analysts wrote in a note, "We believe AMZN's 25% underperformance vs. Nasdaq LTM is being driven by share loss to MSFT and lack of eCommerce profitability. Following our deep dive into AMZN expenses, we believe more layoffs are necessary for eCommerce to become meaningfully profitable. Profitability per employee ex-warehouse workers is significantly below peers': opex ex-D&A/fulfillment up 53% since '19 vs. META/GOOG/MSFT +14%/-2%/-3%. Even assuming eCommerce worth zero implies AWS trading at 34% discount to Azure vs. 4-year average of 21%, suggesting 18% potential upside from multiple expansion as well as higher margins. Lowering target to $125 from $135, but maintaining Outperform as we believe headcount can be right-sized under new CEO Jassy."
AMZN's profitability per employee, excluding warehouse workers, is significantly behind large-cap peers. EBIT per corporate employee was ~$60K pre-pandemic, and then jumped to ~$75K during the pandemic before falling to ~$30K last year. Given significant ramp vs peers, Oppenheimer believes further layoffs are likely required to return to profitability.
The analysts continued in the note, "Our checks confirm client cost optimization is not done. However, we think lower headcount, SBC, and energy costs are enough to offset our previously Street-low AWS EBIT estimates. As a result, our FY23/FY24 EBIT margins are now ~190bps above the Street at 26%/28%."
Oppenheimer reduced FY23 and FY24 revenue by 1% while increasing EBIT 17% and 12% respectively on AWS changes. Oppenheimer's FY24 estimated AWS revenue is 9% below consensus.
Shares of AMZN are down 0.20$ in pre-market trading on Thursday.