The disappointing jobs report doesn't change my outlook for stocks; A look at Amazon's latest earnings and current valuation
1) By now, you've probably seen the news about the disappointing jobs report...
This morning, the U.S. Labor Department reported that the U.S. added a seasonally adjusted 73,000 jobs in July. That came in below consensus expectations of 100,000 jobs.
Here's a chart from a new Wall Street Journal article that shows the monthly job numbers for the past three and a half years:
However, a bigger concern was the revisions to some previous numbers...
The Labor Department revised May's jobs number downward from 144,000 to 19,000 and June's from 147,000 to 14,000. Overall, that's a cut of 258,000.
In other words, in the immediate aftermath of President Donald Trump's "Liberation Day" tariff announcement on April 2, instead of the U.S. economy adding a healthy number of jobs in the subsequent two months... it added almost none.
So why has the unemployment rate remained steady? According to the new jobs report, it edged up 0.1% from last month to 4.2%.
Take a look at this chart of the unemployment rate from the same WSJ article:
According to the WSJ article, part of the answer is due to immigration issues:
A sharp decrease in border crossings is constraining the number of people from abroad coming into the labor force. High-profile immigration raids are keeping many workers at home.
The article also notes that the U.S. population is aging. That means a boost to retirements and limits for the number of younger folks coming into the workforce.
As a result, the WSJ continues:
A year and a half ago, the economy needed to add 166,000 jobs a month to keep the labor market steady, according to [Peterson Institute for International Economics senior fellow Jed Kolko]. As of June, Kolko said, the needed number was only 86,000.
"It's fallen so much because this immigration surge has ended," Kolko said. In other words, a job creation number that might have looked lackluster a year and a half ago might actually be strong today.
However, today's job report doesn't change my overall constructive outlook for stocks.
And that's because the win-win I've outlined many times over the past year looks intact...
As I've said previously, if the economy remains strong, stocks will do well. And if it weakens, that will lead the Federal Reserve to cut rates... which will boost stocks.
2) Shifting gears a bit, let's turn to something else in the spotlight today...
I'm talking about Amazon (AMZN). The company is making headlines today after its latest earnings report.
Along with Alphabet (GOOGL) and Meta Platforms (META) – which I just discussed last week and yesterday, respectively – I've consistently liked Amazon's stock over the long term.
I even named it as a core holding in the April 17, 2019 inaugural issue of my former newsletter Empire Investment Report at my old firm, Empire Financial Research.
Since then, through yesterday's close, it's up 151% versus 119% for the S&P 500 Index.
Well, Amazon reported solid second-quarter earnings yesterday after the market close. But guidance disappointed... so the stock is taking a hit today. (You can see the full earnings release here and investor slide presentation here.)
So let's break down what happened with the report...
Year over year ("YOY"), Amazon's net sales grew 13% (12% when adjusted for foreign exchange rates) to $167.7 billion. That was ahead of expectations of $162.1 billion.
Meanwhile, earnings per share jumped 33% to $1.68. That figure crushed expectations of $1.33 per share.
This chart from the investor presentation shows how profits have grown over the past year:
The highly profitable Amazon Web Services ("AWS") business led the way...
It posted more than 17% revenue growth YOY. That was in line with expectations. And Amazon CEO Andy Jassy says that the company is bullish on this business... and that it has more demand than capacity now. He expects the business will get better each quarter.
This next chart from the presentation shows AWS's net sales and operating income over the past five quarters:
Advertising revenue, which is nearly pure profit, grew 23% YOY to $15.7 billion.
Of course, Amazon is one of the largest companies in the world. And it boasts a staggering $670 billion in trailing-12-month ("TTM") sales.
As such, it's simply incredible that the company keeps growing its top line at double-digit rates while also expanding margins. And that keeps leading to booming profits.
But as I said earlier, the stock is taking a hit today. This comes down to three big reasons...
The first one is guidance.
Keep in mind that Amazon's guidance for third-quarter revenue is a range of $174 billion to $179.5 billion. That's above expectations of $173.2 billion.
However, the midpoint of guidance for operating income (a range of $15.5 billion to $20.5 billion) is well below Wall Street's expectations of $19.5 billion.
The second reason involves cloud computing. This is the area that investors are most excited about.
In Amazon's case, cloud computing is the company's AWS division. And AWS's revenue growth of around 17% paled in comparison to the 32% and 39% cloud revenue growth that Alphabet and Microsoft (MSFT), respectively, just reported.
Lastly, investors are worried about Amazon's surge in capital expenditures ("capex")...
As you can probably guess, all this capex has been driven by the AI arms race. In the second quarter, Amazon's capex nearly doubled YOY and hit $31.4 billion net. That brings the TTM total to $103 billion.
Investors are now rewarding Microsoft, Alphabet, and Meta for their massive AI-driven capex spending because they can see the results. As this new WSJ article notes, Wall Street is looking past the surge in capex for other tech titans:
Microsoft and Meta shares soared Thursday after they reported earnings – and their sizable capital spending – reaching market capitalizations of $4 trillion and nearly $2 trillion, respectively.
However, investors aren't yet seeing enough from AWS to be convinced that Amazon's AI spending is paying off.
This "Heard on the Street" column in today's WSJ has more details:
Amazon said Thursday its cash capital expenditures of $31.4 billion in the second quarter are "reasonably representative" of what it will spend in the next two periods, which would bring the year's total to about $118 billion...
Amazon's big-spending, Big Tech rivals are in the same boat. But Microsoft, Google and Meta Platforms gave investors plenty of good news in their latest reports that softened the blow of those big bills.
As the column argues, Amazon needs AWS to "pack a bigger punch."
So let's turn to valuation...
With the drop, AMZN shares were trading around $220 earlier this morning. Based on that price, this gives the company a market cap of around $2.3 trillion.
With TTM sales of $670 billion, the stock is trading at about 3.4 times revenue.
And with expected earnings of $6.61 per share this year, Amazon is trading at about 33.3 times current-year earnings.
Those are rich multiples. But they're not extreme.
However, they're higher than the same multiples for both Meta and Alphabet. So that's why I prefer those two companies' stocks to Amazon's.
That said, Amazon is a juggernaut. So if I owned the stock, it would be a comfortable hold. And if I didn't, I would look to buy on a more meaningful pullback.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.