Meta stock (META) has dusted Amazon stock (AMZN) year to date — up 78% versus up 22% — and that may strike some investors as bizarre given the fundamental similarities tied to both titans of tech at this moment in time.
Both companies have fired thousands of workers in the past six months after years of aggressive hiring, raising the prospect for better profits in 2023. Both companies are cash rich, a good place to be when you as an investor are witnessing bank failures like the ones seen in March.
And both stocks are trading at steep discounts to their historical 10-year average multiples from price-to-earnings and EV/EBITDA perspectives, based on Yahoo Finance analysis.
Yet Meta stock has become an investor favorite this year, while Amazon shares is relatively lagging.
Why? One Wall Street pro thinks the disparity could be linked to the slowdown and uncertainty in Amazon’s lucrative cloud services business known as AWS. It’s a cloud behemoth that Meta doesn’t operate, and Mr. Market seems to be rewarding that.
“Slowing cloud demand remains a key concern as businesses shift focus from accelerating cloud migration to optimizing cloud costs,” Jefferies analyst Brent Thill in a client note on Tuesday. “AWS estimates continue to contract, with consensus implying year over year growth troughs in 2Q23. Given AWS comprises the vast majority of Amazon’s operating income, a stabilization in cloud is crucial for shares to outperform.”
Thill’s analysis shows 2023 sales estimates for AWS continue to decline, with projections currently 12% lower than they were in February 2022 and 5% lower compared to the start of the year. Operating margin estimates for AWS are alarmingly falling faster, Thill calls out.
AWS operating margin estimates for 2023 have been slashed by 27% compared to where they were in February 2022.
Thill cut his 2023 AWS operating margin estimate by 3.5% in the new note. The analyst doesn’t see operating margins improving for AWS until 2024.
Other stats on AWS to consider from Thill’s analysis:
Consensus estimates imply that the AWS growth rate will bottom in the second quarter of 2023.
AWS year over year net sales growth has decelerated for four straight quarters.
AWS backlog growth has decelerated for three straight quarters.
AWS operating margin remains under pressure since peaking at 35% in the first quarter of 2022, with fourth quarter 2022 AWS operating margin of 24.4% representing the lowest levels since the second quarter of 2017.
Investors remain concerned around the durability of AWS growth as customers shift to cost optimization and delay broader transformations during a period of increased budget scrutiny,” Thill concluded.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email [email protected]
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Source: https://finance.yahoo.com/news/why-amazon-stock-is-underperforming-meta-stock-despite-similarities-115912531.html