Meta stock META has dusted Amazon stock AMZN year to date — up 78% versus 22% — and may strike investors as bizarre given the similarities between the two titans of tech at this moment in time.
Both companies fired thousands of workers in the past six months after years of aggressive hiring, raising the prospect of better profits in 2023. Both companies are cash rich, which is a good place to be when you are witnessing bank failures like the ones seen in March.
Both stocks are trading at a steep discount to their historical 10 year average multiples from price-to earnings and EV EBITDA perspectives, based on Yahoo Finance analysis.
This year, Meta stock has become an investor favorite, while Amazon shares are relatively lagging.
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.
Jefferies analyst Brent Thill said that slowing cloud demand is a key concern as businesses shift focus from accelerating cloud migration to optimizing cloud costs. AWS estimates continue to contract, with consensus implying a year over year growth trough in 2Q 23. A stabilization in the cloud is essential for shares to beat AWS, because it comprises the vast majority of Amazon's operating income. Thill says that the sales estimates for AWS continue to decline in 2023, with projections currently 12% lower than they were in February 2022 and 5% lower than in the beginning of the year. Thill calls out that operating margin estimates for AWS are falling faster.
AWS operating margin estimates for 2023 have been slashed by 27% compared to where they were in February 2022, compared to where they were in February 2022.
Thill cut his operating margin estimate by 3.5% in the new note. The analyst doesn't think operating margins will improve for AWS until 2024.
Other stats on AWS to consider from Thill's analysis:
The AWS operating margin was at 35% in the first quarter of 2022, with the fourth quarter 2022 AWS operating margin of 24.4% representing the lowest level since the second quarter of 2017.
The investors are concerned about the durability of AWS growth as customers shift to cost optimization and delay broader transformations during a period of increased budget scrutiny, according to Thill.
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