Amazon.com, Inc. (NASDAQ:AMZN) has two primary businesses that account for most of the company’s revenue: Amazon.com and Amazon Web Services (AWS). Amazon.com is in charge of the well-known e-commerce platform, both in the United States and internationally, whereas AWS – Amazon Web Services – is in charge of Amazon’s cloud business. Unfortunately, I believe both of Amazon’s major companies will underperform in the coming months as Amazon stock is currently trading at a forward price-to-earnings (P/E) ratio of 48.54
As many investors have already pointed out, Amazon.com is expected to continue its decline as economic growth slows and inflation and interest rates rise. Furthermore, I believe Amazon’s cash cow, AWS, will underperform expectations due to intense competition from Alphabet (NASDAQ:GOOGL). As a result, given that both Amazon.com and AWS are expected to underperform, I believe Amazon has more room to fall.
Because Amazon.com is the largest e-commerce platform in the United States and has a significant international presence, the company is heavily dependent on macroeconomic conditions and consumer financial health. Today’s macroeconomic health and consumer confidence are not ideal.
Because of persistently high inflation, consumer confidence in the United States has fallen to levels comparable to the 2008 recession. Furthermore, despite the Federal Reserve’s aggressive actions, inflation remains high at 8.2%, according to the most recent CPI data. As a result, consumer willingness to shop on Amazon.com is declining, negatively impacting the company’s top and bottom lines.
Both Amazon.com’s North American and International businesses have reported operating losses due to macroeconomic challenges. The North American company lost $412 million in the third quarter, compared to an $880 million profit the previous year. Furthermore, Amazon.com’s international business reported a $2.466 billion operating loss for the quarter, compared to $911 million in the last year’s quarter.
As a result, the abrupt shift in consumer confidence has created a robust negative trajectory for Amazon.com. Because inflation remains persistent, with the Federal Reserve signaling another 75 basis point increase in interest rates, this trend is expected to continue for the foreseeable future, negatively impacting Amazon.
Although AWS remains the market’s largest and most competitive player, the company is expected to face growth and margin pressure soon due to competition and market conditions.
Amazon reported AWS revenue of about $20.538 billion in its 2022Q3 earnings report, a 27.5% increase year over year from $16.110 billion the previous year. The yearly figure may have a positive connotation because it includes quarters when the market was healthy and growing. In terms of quarter-over-quarter growth, however, AWS’s growth rate fell from an average of 8.7% in 2021 to 4.94% in 2022, a 56.7% drop. Furthermore, AWS grew by 4% quarter over quarter in 2022Q3, continuing its slowing growth trajectory.
AWS is Amazon’s most important business because it is the only one currently returning positive operating income. However, AWS’s growth has slowed significantly due to the negative market sentiment.
Furthermore, AWS may experience a slowdown due to competitive pressure from Google Cloud. The market has perceived Google Cloud as a lesser product than AWS; however, with the appointment of its new cloud president Thomas Kurian in 2019, Google has shifted its focus to enterprise cloud. As a result, Google Cloud’s growth has outpaced Amazon’s, with 9.43% sequential growth in 2022Q3 and approximately 163% growth since 2019Q4 compared to AWS’s 106%. Google’s enterprise-first strategy enables AWS customers to diversify their cloud portfolio, limiting AWS’s full growth potential.
While AWS is competitive, and the cloud market is expected to grow at a 15.7% CAGR until 2030, the current market environment in which the Fed is aggressively raising interest rates is affecting the cloud market despite its long-term underlying trend. Google is coming out on top during this time. Given these data points, I believe it is reasonable to conclude that AWS will not save Amazon from a significant slowdown in Amazon.com.
Amazon Stock Valuation
Because of the macroeconomic conditions and lack of confidence, AWS’s growth rate will most likely remain relatively low in the near term. Furthermore, Amzon.com is expected to continue struggling with low consumer demand and the Fed’s determination to raise rates aggressively at any cost to keep inflation low. As a result of multiple contractions, Amazon’s valuation could fall.
AMZN stock is currently trading at a forward price-to-earnings (P/E) ratio of 48.54, which is relatively low compared to Amazon’s historical price-to-earnings ratio. However, given the near-term challenges and Amazon’s expected 2023 growth rate of 14.6%, which is comparable to other tech giants such as Microsoft (NASDAQ:MSFT) at 13.3%, I don’t see a compelling reason why Amazon has such a high valuation while Microsoft has a forward P/E of only 23.04. As a result of Amazon’s slowdown, I believe its valuation multiples will contract.
My bearish thesis on Amazon.com and AWS is predicated on a worsening macroeconomic situation due to the Federal Reserve’s aggressive rate hikes. However, suppose Fed President Jerome Powell hints at the end of the aggressive tightening cycle at the upcoming FOMC meeting on November 3rd. In that case, investors will likely interpret it as a sign that the economic downturn has peaked, increasing Amazon’s valuation. Furthermore, the Fed’s hints of a slowdown in raising rates in the coming months may result in more moderate economic downturns, returning Amazon.com and especially AWS to their growth trajectory.
Amazon.com is expected to continue reporting losses as demand slows significantly due to declining consumer confidence, with no near-term increase in potential. Furthermore, because AWS, Amazon’s cash cow, is experiencing slower growth and margin concerns due to the macroeconomic conditions, I believe investors should not buy more shares until the storm passes. As a result, AMZN stock is a hold.
Featured Image- Pexels @ PhotoMIX Company