U.S. stocks, particularly the tech giants that led an astonishing rally in the first half of the year, accumulating over $4 trillion in combined market capitalization for Nasdaq Composite ($NASX) constituents, have been displaying weakness as September comes to a close. Both the S&P 500 Index ($SPX) and the Nasdaq are heading towards their worst month since December.
Amazon (NASDAQ:AMZN) stock reached its 52-week high of $145.86 on September 14th but has since declined by 13.4%. This decline is more significant than what’s been observed in the broader markets during the same period. So, what’s causing Amazon’s stock to drop, and should you consider buying it at this dip?
Reasons Behind Amazon Stock’s Decline
Several factors contribute to the drop in Amazon stock:
- Rising Bond Yields: The surge in bond yields has had a detrimental impact on growth stocks like Amazon, which derive most of their earnings from future expectations. Higher discount rates diminish the current value of these future earnings.
- Economic Concerns: There are growing concerns about a deteriorating slowdown in the U.S. economy, exacerbated by recent economic data, especially the September consumer confidence index, which fell below expectations. Amazon’s e-commerce business might suffer if U.S. consumers reduce spending amid an economic slowdown.
- Antitrust Lawsuit: The Federal Trade Commission (FTC) has filed a long-awaited antitrust lawsuit against Amazon. Alongside 17 states, the regulator has accused Amazon of “illegally maintaining monopoly power” in a historic lawsuit.
Amazon’s Performance Relative to Its Peers
Despite the recent decline, Amazon’s stock has seen an overall gain of almost 50% in 2023. It’s currently tied with Alphabet (NASDAQ:GOOGL) as the second-best-performing FAANG stock, trailing behind Meta Platforms (NASDAQ:META).
However, Amazon has lagged behind its tech peers since mid-2021 when its market capitalization reached approximately $1.8 trillion. In 2021, Amazon saw a modest gain of 2.4%, and it lost nearly half of its market cap in 2022. Although the stock has seen a year-to-date increase in 2023, it is still trading well below its all-time highs.
The Potential for Amazon Stock’s Recovery
Most Wall Street analysts remain optimistic about Amazon’s potential for recovery. Many believe that if the FTC pushes for a breakup of Amazon, the sum of its parts’ valuation would exceed the company’s current valuation.
D.A. Davidson analyst Tom Forte suggests that if Amazon were split into three businesses – first-party retail, third-party retail, and cloud services – the combined value of these segments could be around $193 per share.
Furthermore, some analysts have proposed that Amazon Web Services (AWS), its enterprise-focused arm, alone could be worth $3 trillion. This figure is more than twice Amazon’s current market capitalization.
AWS has consistently been a significant revenue generator for Amazon, enabling it to invest in various other ventures. While the North American e-commerce segment leads in terms of revenue, AWS contributes disproportionately to the company’s bottom line. In Q2 2023, AWS reported an operating income of $5.4 billion, constituting 70% of the total operating profit, despite accounting for less than 27% of total revenues.
Analyst Forecasts for Amazon
Overall, Wall Street analysts maintain a bullish outlook on Amazon, with a consensus rating of Strong Buy. Nearly 95% of analysts covering the stock rate it as either Strong Buy or Buy, making it one of the highest-rated stocks among FAANG peers.
Amazon’s mean target price of $168.21 is 33% higher than its current levels, indicating the stock has substantial upside potential among FAANG peers based on this metric.
Why Consider Buying Amazon Stock
There are compelling reasons to consider buying Amazon stock:
- Robust Ecosystem: Amazon has established a robust ecosystem with strong network effects. Its logistics network is a competitive advantage, and the importance of Prime membership in terms of revenue generation and customer loyalty cannot be overstated.
- Cost Reduction Efforts: Amazon has implemented various cost-cutting measures, including layoffs and overhead reduction, aimed at improving profitability. The introduction of an ad-supported streaming tier and a higher price for the ad-free version of Prime in the U.S. is expected to further support profits.
- AI Potential: Amazon’s focus on artificial intelligence (AI) is underappreciated. The company’s investments in AI, such as the recent $4 billion investment in Anthropic, are expected to enhance its capabilities in this domain.
- Valuation: While Amazon’s next 12-month price-to-earnings (PE) multiple may not appear low at nearly 50x, it is lower than its historical averages. The next 12-month price-to-sales multiple of 2.17x is also below the 5-year average of 2.94x.
In conclusion, despite recent challenges, there are compelling reasons to consider Amazon as a buying opportunity. A potential breakup could unlock additional value, and the company’s ecosystem, cost-cutting efforts, AI investments, and valuation suggest there may be room for growth ahead.
Featured Image: Unsplash
