Amazon Stock (NASDAQ:AMZN)
Shares of Amazon (NASDAQ:AMZN) have soared in May and are now up 43% for the year. Amazon also reached a new 2023 high on Friday as optimism about a possible debt ceiling deal tempted investors to buy growth stocks again. While Amazon guided for decent second-quarter top-line growth of 5-10% and the company also announced an aggressive push into India for its Cloud business recently, I believe investors are currently a little bit too bullish, in my opinion, and investors may want to wait for a drop before considering a buy position in the e-Commerce company.
Favorable News Help Amazon Reach New 2023 Highs
Amazon stock reached a new 2023 high last week as investor sentiment continued to improve. The financial crisis now appears to be solidly contained with no more bank failures reported since First Republic Bank went under at the beginning of May and investors have been increasingly hopeful last week that both political parties could hammer out a debt ceiling deal (which happened over the weekend).
More good news came from Amazon itself after the company reported Q1’23 earnings. Amazon has reported slowing growth for its important Amazon Web Services business which I discussed in my work: The Big AWS Reset.
Amazon is facing a serious slowdown in its core Cloud business, Amazon Web Services, whose moderating top-line growth is weighing on Amazon’s consolidated revenue growth. Amazon Web Services grew only 16% in Q1’23 compared to 20% in Q4’22 and 37% in Q1’22. Alphabet has also seen a slowdown in its Cloud segment, for the same reason as Amazon: due to macroeconomic uncertainty, companies are reducing their spending on Cloud infrastructure services like the ones provided by Amazon, Microsoft (MSFT), and Google. Still, Amazon Web Services remained by far the biggest Cloud infrastructure service provider with a market share of 32% in the first quarter. The second-largest Cloud service provider remained Microsoft’s Azure with a market share of approximately 23%.
Earlier in May, Amazon announced that it was going to make an aggressive push for its Amazon Web Services business in India. Amazon said that it would invest $13B into India’s AWS capabilities by 2030. India is a fast-growing, developing market with the second-largest population in the world, after China, and therefore represents a tremendous growth opportunity for Amazon’s fastest-growing business segment.
The IT industry in India accounted for approximately 7.4% of the country’s GDP in FY 2022 and this percentage is expected to rise to 10% by FY 2025. India has a blossoming and growing software industry which makes it an attractive market for Amazon’s AWS to single out for rapid expansion. While Amazon’s push to tap the rapidly growing Cloud market in India is a positive for AWS, Amazon is still facing the challenge of overall slowing growth.
Amazon’s Key Problem: Moderating Post-Pandemic Growth
Amazon’s key problem is not going to go away just because the company announced its big Cloud bet on India. The key problem for Amazon is that its top-line growth has slowed dramatically after the pandemic ended. Amazon has benefited greatly as a key player in the e-Commerce market during the COVID-19 pandemic that decimated the brick-and-mortar industry. However, in a post-pandemic world, Amazon’s growth has slowed materially and with AWS slowing as well, the e-Commerce company is facing serious questions about its growth path going forward. I believe these concerns are not going to go away and will resurface again in the short term.
Sell in May and Go Away…
Amazon’s shares made a new 2023 high on Friday and they soared above $120 for the first time since October 2022 on improving market sentiment after Nvidia presented a blow-out outlook for its second quarter and the market gained confidence that debt ceiling negotiations in the U.S. would be successful.
However, with the market becoming more exuberant last week, I believe that Amazon is very highly valued again based on earnings… which translates into an unattractive risk/reward profile, in my opinion. The e-Commerce company is still richly valued and currently trading at a P/E ratio of 47.3X. While this is still below the 1-year average P/E ratio of 59.5X, I believe investors have become overly optimistic about Amazon’s growth potential in May… especially with key growth concerns remaining unaddressed.
According to the RSI, shares of Amazon are now close to being overbought which could be interpreted as a technical contra-indicator. The old saying “sell in May and go away” has some truth to it, and investors may view the current upswing in Amazon’s share price as an opportunity to sell into the exuberance.
Additionally, revenue estimates for Amazon’s next fiscal year (FY 2024) have actually started to drop since the start of the year while top-line estimates for FY 2023 have only trended up slightly lately.
Risks with Amazon
The biggest risk for Amazon, as I see it, is still a slowdown in Amazon Web Services which is experiencing a top-line moderation due to companies optimizing IT spending and cutting back on Cloud investments in a challenged macro environment. If AWS growth slows, so will Amazon’s consolidated growth as the segment is Amazon’s growth driver. If the Fed continues to increase interest rates in the second half of FY 2023, there is an additional risk that the USD will appreciate again which would be a headwind to internationally operating companies like Amazon that achieve a large percentage of their sales outside of the U.S.
Amazon is doubling down on its largest and most promising segment, Amazon Web Services, through its accelerating AWS investment in India. Amazon Web Services has emerged as the company’s growth engine in recent quarters and India is a promising market because India’s economy is heavily driven by IT and it is the second-largest country in the world after China, based on population size. However, I believe that Amazon’s key problem is that overall growth is moderating post-pandemic and revenue estimate trends don’t paint a different picture. Considering that Amazon stock is both expensive, based on P/E, and almost overbought, based on RSI, I believe investors have a great opportunity to sell in May and go away.
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