Amazon remains top pick at UBS — and in our portfolio — despite FedEx’s alarming guidance

Published Fri, Sep 16 20223:06 PM EDT

A new Wall Street research note shows Amazon' s (AMZN) e-commerce sales are holding up, even as many other retailers are struggling. We are particularly encouraged by this analysis, because investors out there may end-up wrongly interpreting FedEx (FDX)'s terrible guidance and economic outlook as a warning about Amazon's business. By all accounts, that couldn't be further from the case. But nevertheless, shares of Club holding Amazon fell nearly 3% in Friday's down market. To be fair, the market never had a chance Friday. Shares of FedEx plunged roughly 22% after the company late Thursday reported lower-than-expected fiscal first-quarter results, issued current quarter guidance short of estimates, and withdrew its full-year outlook. FedEx blamed the macro environment, and new CEO Raj Subramaniam told Jim Cramer in an interview that he expects a worldwide recession . The delivery company's warnings weighed heavily on the broader market. Analysts are now scrambling to assess whether the problems that FedEx described in its business and the global economy at-large will slow Amazon's e-commerce. UBS said in note to clients that they don't think that's going to be the case. UBS analysts started by looking at the government's latest report on retail sales, which are not adjusted for inflation. In August, sales at non-store retailers, a proxy for e-commerce, rose 12.3% year over year. Using their modeling, the analysts think Amazon's sales in North America will grow 16.5% year-over-year to roughly $76.4 billion in the current third-quarter, which would be about in-line with the consensus estimates of $77 billion. With speculation of another Prime Day event coming up this year, combined with falling energy and shipping prices and less capacity all bode well for the company's operating income margin for the remaining two quarters of the year, the note explained. While UBS likes Amazon on retail growth and margins, it thinks Wall Street estimates on Amazon Web Services (AWS) are "slightly aggressive" in the third quarter but sees stable secular trends. "We feel good about the secular trends in cloud and AWS positioning but see Street numbers biased downward," UBS analysts said. In the Club's "Morning Meeting" on Friday , Jim Cramer said he thinks that the issues with FedEx are 70% macro-related, 30% company-related, noting an oversupply in FedEx's businesses as well as service problems in Europe. Since there are many differences between FedEx and Amazon's business, we are sticking with our long-term thesis on Amazon. "We said we'll buy Amazon at $120. I'm sticking by it," Jim added. During a period of weakness, we are looking to bulk up on companies that are nimble and we see Amazon as a bellwether that can keep up with current economic challenges. Bottom line We like UBS' work here as many on Wall Street clearly extrapolated FedEx's guidance to mean Amazon's e-commerce business is struggling — when, in actuality, it is not. Though UBS mentioned AWS could be a disappointment, we didn't get a sense that the long-term opportunity has changed when Jim interviewed AWS CEO Adam Selipsky this past week. Like UBS, we like Amazon, but we are patiently waiting for further weakness to add to our position again as we recognize technology stocks have become falling knives in this market due to rising interest rates, a strengthening dollar, and global macro concerns. We're not sure whether Amazon might be more immune to the type of slowdown that FedEx sees, but it's possible that Amazon, a $1.2 trillion company has further insulation because it has a diversified business. Amazon is more than just an e-commerce platform. AWS continues to be the most widely adopted set of cloud services in the market, according to Amazon's second quarter results . Amazon advertising business is another profit-generating, high margin business segment. AWS delivered a 33% increase in revenue of $19.74 billion in revenue during the second quarter. If consumers roll back their discretionary spending, which Amazon's e-commerce business relies on, profits from AWS can help offset changes in consumer spending behavior. Amazon's advertising business grew 18%, generating $8.76 billion in the second quarter, proving to be a source of strength during a time where businesses are cutting advertising expenses. Fellow Big Tech company, Alphabet (GOOGL) saw ad growth of just 12% year over year. When it comes to inflationary pressures, Amazon has acknowledged that it's bogged down with higher fuel and transportation costs, but management's strategy is to focus on improving the efficiency of its fulfillment network to make a better customer experience, a factor that could contribute to higher revenues. Furthermore, Amazon recently announced a multi-year investment in its warehousing and distribution networks to help sellers with bulk inventory storage and automated distribution. This investment will help sellers manage their operations by can handling supply issues better and reducing costs. (Jim Cramer's Charitable Trust is long AMZN, GOOGL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. 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Amazon signage is displayed outside of an Amazon.com Inc. delivery hub in the late evening of Amazon Prime Day, July 12, 2022 in Culver City, California.

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