Shares of the internet giant Amazon (NASDAQ: AMZN) have dropped nearly 39% from the 52-week high. Its slowing top-line growth amid normalization in demand trends, cost headwinds, and overall selling in the high-growth tech stocks are to blame for this decline.
For context, Amazon’s net sales growth rate has decelerated over the past four consecutive quarters. Notably, Amazon’s net sales growth slowed to 7% in Q1 of 2022 compared to the 9% growth in Q4 of 2021.
While AMZN’s revenue growth slowed, it faced multiple cost pressures, including productivity and inflation (higher wages and shipping costs).
Now WhatAmazon’s short-term guidance suggests that the company continues to face headwinds that would impact its net sales growth and hurt margins.
It projects 3-7% growth in its net sales in Q2, implying a further slowdown in growth rate. Uncertainties regarding customer demand and spending, and inflation remain a drag. Meanwhile, Amazon expects to incur $4 billion in incremental costs in Q2 due to the cost inefficiencies and inflationary pressure.
Deutsche Bank analyst Lee Horowitz termed AMZN’s Q2 revenue outlook as disappointing. However, the analyst highlighted that with “Prime Day moving out of the 2Q and into the 3Q in 2022, there is a fair amount of noise in the 2Q guide. In fact, we believe that Prime Day drove $3.6bn in revenue in 2Q21, suggesting that ex-Prime Day, the high end of guidance implies 10% underlying growth in the 2Q.”
Horowitz lowered his estimates and price target on AMZN stock due to the slowdown. However, he maintained his bullish outlook. Including Horowitz, 35 analysts have recommended a Buy on Amazon stock. One analyst recommends Hold, and one has a Sell rating.
Further, the average Amazon price target of $3,647.08 implies 58.1% upside potential to current levels.
Bottom LineAmazon’s long-term prospects remain intact. Its strong capital investments (about $61 billion in the trailing 12-month period) and expansion of its fulfillment network (it doubled the size of its fulfillment network in the last 24 months) provide a solid foundation for growth.
Further, the ongoing momentum in its high margin AWS business, reflected through its growing customer base and accelerated pace of digital transformation, bode well for growth.
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This year's first-quarter 13-F filings revealed that Daniel Loeb's Third Point LLC reduced its stake in Amazon (AMZN) stock from 235k shares to 17.5k shares. Loeb's Third Point is one of many institutions that lost interest in Amazon stock during the first quarter. In fact, TipRanks' hedge fund trading activity tool suggests that 2.9 million Amazon shares were sold by hedge fund managers during the previous quarter, conveying a bearish sentiment among the big hitters.
Hedge funds generally specialize in short-term tactical investment strategies. Thus, the recent sell-off suggests that Amazon stock possesses fault lines.
I'm bearish on the stock, given the current market sentiment and a few worrisome idiosyncrasies linked to Amazon stock.
The Market ClimateThe financial markets are experiencing what's called risk-aversion. In theory, this means that investors are opting for safer assets with proven results rather than assets with future growth prospects. Risk-aversion is perfectly normal whenever economic conditions are slowing, as it's inextricably linked to rising inflation and erosion of real wages.
Furthermore, big technology stocks such as Amazon thrived during the earlier stages of the pandemic as interest rates and inflation were both low. Additionally, technological innovation proliferated during the pandemic, providing a critical tailwind to Amazon stock.
However, the historical oscillation of the stock market suggests that the market has two sides to it, meaning that every bullish period is likely followed by a bearish period. As of now, we're in a very bearish period for Amazon stock, hence its more than 30% year-to-date drawdown.
Lastly, it's unlikely that economic conditions and the stock market alike will revert to a growth trajectory anytime soon. There are significant supply-chain concerns due to a slowdown in Chinese industrial production and high freight costs. In addition, inflation in the jobs market is a massive issue for companies as it's diminishing the intrinsic value of their organizations.
Recent EarningsAmazon's first-quarter earnings report conveyed the challenging economic conditions that it's faced with. The company revealed an earnings miss of $16.05 per share due to rising input costs and losses on its Rivian (RIVN) investment.
Results from the quarter showed that Amazon's free cash flow decreased 1.97x year-over-year, indicating that the stock's implied intrinsic value has eroded significantly. To make matters even worse, the firm's free cash flow would've decreased 2.97x if non-cash costs such as depreciation & amortization weren't overlooked.
Furthermore, Amazon's net income dropped 20% year-over-year, suggesting that rising input costs are catching up with the firm. The United States has nearly two jobs available for every unemployed person, conveying a tight labor market with unrealistic wage demands. It's unlikely that high wage demand will subside until inflation finds calm, which is unlikely to happen anytime soon.
The final matter to consider from Amazon's first-quarter results is its $7.6 billion loss on its Rivian investment. Amazon reportedly owned more than 20% of Rivian, meaning that the stock's losses were reported as part of Amazon's income statement.
Amazon's decision to speculate on Rivian suggests that its real growth has stagnated, prompting the company's management to make risky bets that could influence the stock's risk-return profile.
Quantitative AnalysisThe stock isn't in good shape from a quantitative vantage point. First of all, it seems as though Amazon has reached a cyclical peak, with its forward price-earnings ratio being 26.4% higher than its five-year average.
TipRanks' price/earnings algorithm indicates that Amazon's current price-earnings (53.2) ratio is still on the lower end of its valuation spectrum. However, this matter needs to be looked at out of isolation. For instance, it's forecasted that the company's earnings per share will decrease significantly by the time it reports its second-quarter earnings, subsequently diluting the validity of a low trailing price-earnings ratio.
Furthermore, Amazon doesn't exhibit good style ratios. For example, the stock's year-over-year return on equity decrease (-43.46%) coupled with the fact that it's trading below its 50-, 100-, and 200-day moving averages implies that the stock is in poor shape.
Wall Street's TakeTurning to Wall Street, Amazon earns a Strong Buy consensus rating based on 36 Buys, one Hold, and one Sell rating assigned in the past three months. The average Amazon stock price target of $3695.95 implies 59.2% upside potential.
The Bottom LineAmazon stock isn't in great shape at the moment, hence the recent hedge fund sell-off. The company's recent earnings miss illustrates the effect of rising input costs and its poor judgment on Rivian stock. Lastly, quantitative metrics and the current market environment don't align well enough for Amazon stock to perform.
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