/Amazon%20Holiday%20delivery.jpg)
U.S. stocks - and especially the tech names that led a jaw-dropping first-half rally, which added over $4 trillion to the combined market cap of Nasdaq Composite ($NASX) constituents - have looked weak in the final stretch of September. Now, the S&P 500 Index ($SPX) and Nasdaq are headed for their worst month since December.
Amazon (AMZN) stock hit its 52-week high of $145.86 on Sept. 14, and has since fallen 13.4%. The drawdown in the stock is much deeper than what we’ve seen in the wider markets during this time frame. So, why is Amazon stock dropping - and should you buy the dip now?
Why is Amazon Stock Dropping?
Amazon stock is dropping due to the following factors:
- Rising bond yields have taken a toll on growth stocks like Amazon, which have most of their earnings skewed towards the future - and these earnings become less valuable in current dollar terms when discounted at a higher rate.
- There are concerns over a worsening slowdown in the U.S. economy after a flurry of recent economic data, especially the September consumer confidence index that came in below estimates. Amazon’s e-commerce business could slow down if U.S. consumers cut down on their spending amid a slowing economy.
- The Federal Trade Commission (FTC) has filed its long-awaited antitrust lawsuit against Amazon. The regulator, along with 17 states, has accused Amazon of “illegally maintaining monopoly power” in a historic lawsuit.
AMZN Has Underperformed Its Tech Peers
Despite the recent fall, AMZN stock is still up almost 50% in 2023 and is tied with Alphabet (GOOGL) as the second best-performing FAANG stock behind Meta Platforms (META).
However, it has trailed its tech peers since mid-2021, when its market cap peaked at around $1.8 trillion. AMZN gained a mere 2.4% in 2021, and lost almost half of its market cap in 2022. Despite the year-to-date rise in 2023, the stock trades significantly below its all-time highs.
Will Amazon Stock Recover?
Most Wall Street analysts believe that Amazon stock will recover and go back up. Many believe that if the FTC pushes for a breakup of Amazon, the sum of the parts valuation would be higher than the company’s current valuation.
D.A. Davidson analyst Tom Forte believes that if Amazon is split into three businesses - first-party retail, third-party retail, and cloud - the combined worth of the three would be around $193 per share.
Last year, Redburn analyst Alex Haissl said in a note that Amazon’s enterprise-focused Amazon Web Services (AWS) alone could be worth $3 trillion - which is over twice Amazon’s current market cap, for context.
AWS has long been the cash cow for Amazon, providing it with the firepower to invest in other businesses. While the North American e-commerce segment is the biggest segment for Amazon when it comes to revenue, AWS makes an outsized contribution to the bottom line. In Q2 2023, AWS reported an operating income of $5.4 billion, which was 70% of the total operating profit, while its share in total revenues was less than 27%.
AMZN's Analyst Forecast
In general, Wall Street analysts are quite bullish on Amazon stock, and it has received a consensus rating of Strong Buy. Almost 95% of the analysts covering the stock rate it as either a Strong Buy or a Buy, which stacks up with Meta for the highest rated among FAANG peers.
Amazon’s mean target price of $168.21 is 33% above current levels, and it has the highest upside potential among FAANG peers based on this metric.
Why It Makes Sense to Buy Amazon Stock
I believe it makes perfect sense to buy the dip in Amazon stock for the following reasons.
1. Amazon Has an Impeccable Ecosystem
While the e-commerce industry is witnessing increasing competition, Amazon has built an impeccable ecosystem with strong network effect. The company’s logistics network is another competitive advantage, even as competitors like Walmart (WMT) are playing catch-up. The importance of Prime cannot be understated here; apart from being a revenue driver, it also helps increase customer stickiness and order rates on the e-commerce platform.
2. Amazon’s Cost Cuts Will Help Improve Its Profitability
Amazon has taken several measures to cut costs. These include mass layoffs, pausing the construction of its HQ2 in Virginia, and lowering its overhead. It has also come up with an ad-supported streaming tier, and raised the price of the ad-free version of Prime in the U.S., which should also help support its profits. Its cash flows should also improve in the coming quarters as it makes fewer investments into the business, after it overinvested during the last couple of years.
3. Amazon is an Underappreciated AI Play
I believe that Amazon is an underappreciated artificial intelligence (AI) play. During the Q2 earnings call, Amazon talked about its AI initiatives extensively, and CEO Andy Jassy said that data is the “core” of AI, adding, “AWS not only has the broadest array of storage, database, analytics, and data management services for customers, it also has more customers and data store than anybody else.” The company has recently announced a $4 billion investment in Anthropic, which will help further boost its AI capabilities.
4. AMZN Looks Undervalued
While Amazon’s next 12-month (NTM) price-to-earnings (PE) multiple of nearly 50x might not seem low on a standalone basis, it is lower than its historical averages. Also, the NTM price-to-sales multiple of 2.17x is below the 5-year average of 2.94x. While the triple-digit PE multiples that Amazon once traded at might be behind us, the current multiples nonetheless look on the lower side.
Finally, while FTC chair Lina Khan hasn’t publicly commented on whether the regulator will seek to break up Amazon, a forced breakup might not be that bad for the burgeoning conglomerate, as the current valuations seem grossly out of sync with the sum of the parts valuation.
On the date of publication, Mohit Oberoi had a position in: AMZN , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
