fbpx

Education Series: Single-Stock ETPs

Amazon: Reduced Sales, Chaotic Earnings

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

Amazon is an odd and messy “mega-cap” stock. Its highly-valued e-commerce business initially fueled the growth of a cloud computing infrastructure business that later went on to subsidize the entire company which went to start a multimedia content business ostensibly designed to drive e-commerce adoption. Late last year, after a wave of prominent activist investor called for such conglomerates with disparate to simplify value propositions and enhance asset valuations, two American giants – Johnson & Johnson and General Electric – announced plans to break up.

On account of the company’s AWS being highly-vaunted, Amazon largely resisted calls to break up in a year when 51 other companies committed to. However, this year, debate on this continues on a more low-key basis in institutional investor and hedge fund circles. On the more public side were demands from a prominent U.S.-based small business coalition at the dawn of Q2 – and potential special interest group with legislative influence. Shortly after this came a hotly-contested piece of legislation making its way through the U.S. legislature that aims to limit the influence wielded by the likes of Amazon on national commerce. Meanwhile, the company’s India e-commerce business remains mired in controversy that could potentially drain the goodwill it received when entering the market – just as its China business did before shutting down. Earlier this year, the company announced that it’s even shutting its Kindle Store in China.

Whether the legislation passes or not is presently a matter of conjecture; what is relevant that the “chimera”, while well-funded, hasn’t been very nimble lately.

Segment Incomes and Trends

Given that it is a company with high scalability costs – be it in e-commerce or cloud infrastructure, lets consider segment operating incomes from the company’s financial statements for a “heat map” schema used in recent articles to highlight each segment’s operating income share each quarter:

One modification was done to the “heat map” schema here: the company’s share buyback program – which kicked it into effect this year, as per the financial statements – has been included to highlight the effects on the company’s earned income. If the share buyback program were to be considered relative to total operating income earned, the company has been burning through them the past two quarters. In fact, as the “heat map” shows it has burnt more in share buybacks than it has earned as income in Q2. 

The negative rates in the Year Till Date (YTD) are quite interesting in that they show how much AWS has been carrying the load in recent times. As the “heat map” indicates, the company’s e-commerce + content segment (which is the only way one can analyze the befuddling mix of Prime Studios and e-commerce) had largely held their own on a “North America + International” basis quite decently until Q2 of last year. The segments began their sag from the Q3 results of last year onwards. 

Next, the “heat map” schema is applied on quarter-on-quarter (QoQ) growth in operating income to determine segment trends:

Once again, the “heat map” breaks down after Q2 2021, requiring manual intervention. The cells marked in yellow with the red text are excluded from the “heat map” formulation. The trend analysis here yields some interesting facets nonetheless:

  1. In terms of growth, the AWS segment has the only one that has shown positive growth all the way until Q2 of this year.
  2. The “e-commerce + content” segments have been a mixed bag, to put it mildly. Incomes for the “International” segment was negative in Q1 2020 (as well as Q4 2019) but there was a long period of positive incomes for both North America and International segments since then till Q3 2021, where the International segment fell into the negative once again. Since Q4 2021, both segments have been negative, with the International segment leading in losses in two of three quarters (the “North America” segment led in Q1 2022).

The negative trends since Q4 2021 is the reason why manual intervention was required: for the International segment, Q4 2021 was a larger loss than the previous quarter but the “heat map” would paint it in a positive colour. Similarly, Q1 2022 was a larger loss for the “North America” segment than the previous quarter and the “heat map” would have shown this as a positive. 

While Q2 of this year has the “North America” segment showing a lower loss and the “International” segment a higher loss than in the previous quarter, the fact remains that losses have continued.

Macroeconomic Factors and Price Ratio Trends

When it comes to business of e-commerce, there are at least some intuitive commonalities with the likes of Meta Platforms (which was covered last week) and Alphabet: if the general public lowers consumption, this has an impact on the bottom lines of a company operating in this space, no matter how well-managed it is. 

For instance, in the U.S. Census Bureau’s Monthly Retail Trade Report, the “Monthly” indicator shows a slight stabilization of sorts – with even a slight uptick – in the first two months of Q3.

In the Advance Report (ex-Auto & Gas) – which has tended to show the same trends as in the Monthly Report, September is seen to be indicating lower sales.

The overall macroeconomic outlook has been covered in a number of articles over the past few months. It’s not a pretty picture: individual debt remains high and wage earnings growth isn’t really keeping up with inflation. Consumer Price Index levels show a returning trend in increasing month-on-month deltas in inflation since July:

With an ongoing squeeze in incomes and spends, the proposition of weak retail sales till September (both actual and advance) can be merged with the CPI trajectory to infer that while dollar sales might be stable and even upward-trending, sale volumes are decreasing. 

An examination of the trends in the Price to Earnings (PE) Ratio relative to the broad-market S&P 500 with correlation as a “goodness of fit” measure would be in order, similar to that done for Apple as well as Meta and Alphabet.

As it turns out, unlike with the three aforementioned FAANG stocks, trends are utterly dissimilar. The stock has traditionally been rather highly valued and shows little correlation with trends in the other constituents of the S&P 500. In the Year to Date (YTD), the stock’s valuation shows an outsized sensitivity to the crests and troughs of the broad index. One lesson that should be eminent in the year so far is: with overvaluation comes volatility. 

This overvaluation is evident even in consensus estimates for the stock in the YTD so far: the company has missed them by a massive margin.

A sort of unwritten rule of thumb among institutional analysts is that earnings growth are generally estimated somewhat conservatively. As a result, positive earnings surprises tend to be more common than not. As a result of the surprise, there is even a momentary bump in the stock’s price. In the company’s case, the analysts’ valuation models get cloudy because of its disparate businesses and individual investors often miss the point that messy value propositions isn’t the same as robustness. 

Individual investors have been exiting the market in droves throughout the year, with the last week of September alone accounting for nearly as much in exits as the rest of that month.

The forward earnings of the broad market (i.e. the S&P 500) is under significant bearish pressure and has already erased valuation gains nearly all the way back to start of 2019.

What does help the company’s stock, however, is a facet gleaned from a number of reports produced by investment houses in the last couple of weeks that indicated that high-net worth investors and institutional investors have switched to purchasing broader ETFs over stocks. While inflows have increasingly been towards defensives and energy, consumer discretionary have also witnessed an uptick in buy-ins.

Given that the company’s stock is included as a constituent of many broad market ETFs as well as consumer discretionary ETFs, it is quite likely that the stock price will witness some rises as further units of ETFs are created and traded. Historically, investment managers managing passive investment vehicles have had a significant presence in the stock’s ownership patterns. 

Macroeconomic Factors and Price Ratio Trends

It is quite likely that the company will miss consensus earnings estimates for Q3. At the same time, there’s every possibility that most analysts might have adjusted their models as a result of which the company’s upcoming earnings will be a positive surprise.

Given lowered liquidity, there’s no telling if the stock price bump will be pronounced or even sustained. At the same time, given the increasing switch to ETFs over “single names” and the fact that ETF issuers have to physically purchase the underlying to create new issuances, even a bearish trend could show up in the charts as being bucked. 

At this juncture, on the question of whether to “buy” or “sell” this fine mess, your guess is as good as ours.

Exchange-Traded Products (ETPs) offer substantial potential to gain magnified exposure with potential losses limited to only the invested amount and no further. Learn more about Exchange Traded Products providing exposure on either the upside or the downside to the S&P 500, and the upside or the downside to Amazon’s stock.

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Posts

Search

Search
Generic filters
Exact matches only
Search in title
Search in content
Search in excerpt
Filter by Categories
Education
In the press
Market Insights
Uncategorized

Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

Senior Analyst

Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

Director

Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

Welcome to Leverage Shares

Terms and Conditions

Notice

If you are not classified as an institutional investor, you will be categorised as a private/retail investor. At this time, we cannot send communications directly to private/retail investors. You are welcome to view the contents of this website.

If you are an ‘Institutional investor’, you affirm either that you are a Per Se Professional Client, or that you wish to be treated as an Eligible Counterparty Client, both as defined under the Markets in Financial Instruments Directive, or an equivalent in a jurisdiction outside the European Economic Area.

Risk Warnings

The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. Trading in ETPs may not be suitable for all types of investor as they carry a high degree of risk. You may lose all of your initial investment. Only speculate with money you can afford to lose. Changes in exchange rates may also cause your investment to go up or down in value. Tax laws may be subject to change. Please ensure that you fully understand the risks involved. If in any doubt, please seek independent financial advice. Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuer.

This website is provided for your general information only and does not constitute investment advice or an offer to sell or the solicitation of an offer to buy any investment.

Nothing on this website is advice on the merits of any product or investment, nothing constitutes investment, legal, tax or any other advice nor is it to be relied on in making an investment decision. Prospective investors should obtain independent investment advice and inform themselves as to applicable legal requirements, exchange control regulations and taxes in their jurisdiction.

This website complies with the regulatory requirements of the United Kingdom. There may be laws in your country of nationality or residence or in the country from which you access this website which restrict the extent to which the website may be made available to you.

United States Visitors

The information provided on this site is not directed to any United States person or any person in the United States, any state thereof, or any of its territories or possessions.

Persons accessing this website in the European Economic Area

Access to this site is restricted to Non-U.S. Persons outside the United States within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended (the “Securities Act”). Each person accessing this site, by so doing, acknowledges that: (1) it is not a U.S. person (within the meaning of Regulation S under the Securities Act) and is located outside the U.S. (within the meaning of Regulation S under the Securities Act); and (2) any securities described herein (A) have not been and will not be registered under the Securities Act or with any securities regulatory authority of any state or other jurisdiction and (B) may not be offered, sold, pledged or otherwise transferred except to persons outside the U.S. in accordance with Regulation S under the Securities Act pursuant to the terms of such securities. None of the funds on this website are registered under the United States Investment Advisers Act of 1940, as amended (the “Advisers Act”).

Exclusion of Liability

Certain documents made available on the website have been prepared and issued by persons other than Leverage Shares Management Company. This includes any Prospectus document. Leverage Shares Management Company is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, Leverage Shares Management Company shall not be responsible for loss occasioned as a result of reliance placed on any part of the website and it makes no guarantee as to the accuracy of any information or content on the website. The description of any ETP Security referred to in this website is a general one. The terms and conditions applicable to investors will be set out in the Prospectus, available on the website and should be read prior to making any investment.

Leverage Investment

Leverage Shares exchange-traded products (ETPs) provide leveraged exposure and are only suitable for experienced investors with knowledge of the risks and potential benefits of leveraged investment strategies.

Cookies

Leverage Shares Management Company may collect data about your computer, including, where available, your IP address, operating system and browser type, for system administration and other similar purposes (click here for more information). These are statistical data about users’ browsing actions and patterns, and they do not identify any individual user of the website. This is achieved by the use of cookies. A cookie is a small file of letters and numbers that is put on your computer if you agree to accept it. By clicking ‘I agree’ below, you are consenting to the use of cookies as described here. These cookies allow you to be distinguished from other users of the website, which helps Leverage Shares Company provide you with a better experience when you browse the website and also allows the website to be improved from time to time. Please note that you can adjust your browser settings to delete or block cookies, but you may not be able to access parts of our website without them.

This website is maintained by Leverage Shares Management Company, which is a limited liability company and is incorporated in Ireland with registered offices at 2 Grand Canal Square, Grand Canal Harbour, Dublin 2. 

By clicking you agree to the Terms and Conditions displayed.