Nasdaq AMZN Amazon

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The recent bear market has left many investors scared and reluctant to invest. Many one-time high-flyers in technology, both inside and outside the Nasdaq Composite, now trade at a fraction of their highs. The Composite itself is down about 31% year to date.

Amazon (NASDAQ: AMZN) stock has declined significantly (over 36% this year) and is trading near the 52-week low. Besides the general market selling in tech stocks, the slowdown in e-commerce growth and inflationary cost pressure weighed on the shares of this internet giant. 

What’s Next? 

Amazon’s guidance for Q2 indicates that the worst is still not over. Notably, its net sales growth rate has consistently lost steam over the past four quarters. For instance, Amazon’s net sales growth decelerated to 7% in Q1 of 2022 from 9% in Q4 of 2021. Moreover, Amazon expects 3-7% growth in its top line in Q2, implying further softness. 

Tough comparisons and macro headwinds impacting consumer spending will likely pose challenges. While its top-line growth could slow further, incremental costs will likely pressure margins. In Q2, Amazon expects to incur about $4 billion in incremental costs due to inflation and productivity issues. 

Now What?

While Amazon’s weak near-term outlook and uncertainty over the economic trajectory could limit the recovery in the stock, the momentum in its cloud business is a bright spot. During the last reported quarter, Amazon’s cloud business delivered net sales growth of 37%. 

Its growth could reaccelerate as comparisons ease. Meanwhile, pressure on its margin will ease as it laps the higher cost environment in the second half of this year. Amazon will also likely benefit from solid capital investments in its cloud and consumer business. However, Rosenblatt Securities analyst Barton Crockett has a different view and remains sidelined on AMZN stock. 

Crockett stated, “Amazon’s multi-year extraordinary out-performance in retail has substantially diminished. We expect that to persist. Other elements of Amazon remain secularly hearty, including AWS. Progression towards retail maturity and heightened macro risks move us to a lower long-term multiple assumptions.”

While Crockett remains sidelined, most Wall Street analysts believe Amazon could bounce back strongly due to its leadership position in e-commerce and cloud and maintain a bullish outlook on the stock.

For instance, AMZN stock has received 36 Buy, one Hold, and one Sell recommendations for a Strong Buy consensus rating. Meanwhile, the average Amazon price target of $178.56 implies 68.2% upside potential to current levels.

Bottom Line

Amazon faces multiple sales and margin headwinds in the short term. However, the company's market leadership in consumer and cloud business suggests that its growth could reaccelerate as the operating environment improves. Further, easier comparisons in the coming quarter could limit the downside risk. 

AMZN stock has an Outperform Smart Score of 8 out of 10 on TipRanks. Further, hedge fund managers (bought 1.5M AMZN stock in the last quarter) and retail investors are accumulating AMZN stock on this dip. 

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It's rough out there for investors. The S&P 500 now sits more than 22% below January's peak, reaching a new 52-week low just last week as a result of the pullback. And it feels like stocks could move even lower before all is said and done.

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