For the past couple of months, Wall Street and investors have been given a not-so-subtle reminder that stocks can fall just as easily as they can rise. Both the iconic Dow Jones Industrial Average and benchmark S&P 500 are in correction territory (i.e., down 10% or more from their all-time closing highs), while the tech-dependent Nasdaq Composite has entered a bear market, with a decline of more than 20%.
When volatility picks up, investors often seek shelter in brand-name companies. Keep in mind, though, these brand-name companies aren't always slow-growing or sought out for their dividend income.
Image source: Amazon.
Amazon is an investor favorite (and with good reason)
E-commerce giant Amazon (AMZN -1.64%) is easily one of the most-popular investments for Wall Street professionals and retail investors. In fact, it's one of the top recurring investments for retail investors on Robinhood.
The most obvious reason for investors to flock to Amazon is that it's a brand-name company with a trusted product or service. Famous investor Peter Lynch is known for promoting the "buy what you know" mantra, and purchasing shares of Amazon is a perfect example of putting this into effect.
Amazon's online marketplace is absolutely dominant, with an eMarketer report last August predicting that Amazon would collect approximately $0.41 of every $1 spent online in the U.S. in 2021. That's nearly six times the market share of Walmart, which is the next-closest competitor in term of U.S. online retail sales. Amazon's online marketplace has played a key role in helping the company sign up at least 200 million Prime members worldwide.
Professional and retail investors have also come to trust Amazon due to its long-term outperformance. If you purchased Amazon on Day One following its initial public offering (IPO) in May 1997, you'd be sitting on an aggregate gain of nearly 145,000%, through March 14, 2022. Not too shabby for a 25-year investment.
Plus, it's been more than a decade since Amazon's stock has pulled back more than 34% from its all-time high. Anytime Amazon's shares decline, investors have been quick to buy the dip.
Image source: Getty Images.
Warning: Amazon is likely to report its largest quarterly loss ever in Q1
However, Amazon's faithful shareholders (myself included) may be in for a bit of a surprise come late April, which is when the company typically reports its first-quarter operating results.
Although Amazon's shares are pricey on a fundamental basis, the company hasn't reported a quarterly loss in seven years (since Q1 2015). I expect this to change in a big way late next month. Not only will I be looking for Amazon to report a quarterly loss, but I'm expecting it to be the biggest loss in the company's storied history.
You might be scratching your head and wondering what's changed or deteriorated with Amazon's operating model for the company to swing from recurring profits to a loss that would top the $545.1 million net loss ($1.53 a share) reported in the fourth quarter of 2000. What I can tell you is that it has absolutely nothing to do with Amazon's operating performance and everything to do with the company's investment in electric vehicle (EV) manufacturer Rivian Automotive (RIVN -2.21%).
For those who might recall, Rivian was the hottest IPO on the planet in 2021. At its peak, shares of the EV maker hit $179.47 on an intra-day basis during the fourth quarter, valuing the company at roughly $158 billion. By the end of the year, shares of the company retraced to $103.69.
According to an October filing with the Securities and Exchange Commission (SEC), Amazon had invested $1.345 billion in Rivian before its IPO. As of February, Amazon noted it owned 162,086,884 shares of Rivian, or about 18.1% of the company's outstanding shares, not including warrants. During the fourth quarter, Amazon recognized an $11.8 billion pre-tax gain on its Rivian investment.
But things have changed drastically since the end of the fourth quarter. Supply chain concerns coerced Rivian to walk down its full-year production forecast to 25,000 EVs from what the company believes would have been 50,000 EVs without supply constraints. Rivian's share price closed at just $35.83 on March 14.
If we hypothetically assumed the quarter ended now, Amazon would book a pre-tax mark-to-market loss on its Rivian investment of $11 billion in the first quarter. That's a loss of close to $22 a share, and it would blow Amazon's previous largest quarterly loss of $1.53/share out of the water.
Image source: Getty Images.
Put an asterisk on this expected loss and focus on what matters
While a large quarterly loss from Amazon is bound to raise some eyebrows and drop some jaws, I'd strongly suggest putting an asterisk next to this expected loss and paying close attention to what actually matters -- i.e., Amazon's operating performance.
Though growth at the company's online marketplace is expected to slow considerably as inflation picks up and tightens consumers' wallets, the important thing to note is that Amazon's higher-margin segments continue to fire on all cylinders.
For instance, the company's subscription services, spearheaded by Prime memberships, keeps growing by a healthy double-digit percentage. With Amazon increasing its monthly and annual cost for Prime, it should have no issue boosting its subscription services operating margin.
Even more important to Amazon is the rapid growth of Amazon Web Services (AWS). AWS is the leading provider of cloud infrastructure services in the world and accounted for a third of global cloud infrastructure spend in the fourth quarter, based on estimates from Synergy Research Group. Even though AWS only brought in 13% of Amazon's net sales in 2021, it was responsible for 74% of the company's full-year operating income. AWS also grew sales by a lights-out 37% to $62.2 billion in 2021.
In other words, Amazon is growing in all the high-margin segments that matter most. This should lead to the rapid expansion of the company's operating cash flow through at least mid-decade, if not well beyond.
