Even though Amazon.com, Inc. (NASDAQ:AMZN) reported decent earnings results for Q3, there’s a risk that its shares could depreciate in the coming months due to the rise of macroeconomic risks that are likely to outweigh most of the growth opportunities. While most of my bullish recommendations played out well in the last year except for the last one, I think now is the time to downgrade my rating as some of the risks, which are outside of Amazon’s control, could have a negative impact on the company’s performance in the short term.
AMZN Q3 Was A Success
Earlier today Amazon reported its Q3 earnings results, which didn’t disappoint the company’s shareholders. Amazon’s revenues during the quarter were $143.1 billion, up 12.6% Y/Y, and above the estimates by $1.54 billion. At the same time, the company’s EPS stood at $0.94 in Q3.
Such decent results were achieved in part thanks to the growth of the overall eCommerce market, which was boosted by the impressive U.S. GDP growth rate of 4.9% in Q3. Amazon’s report shows that North American sales were up 11% Y/Y to $87.9 billion, while the international sales increased by 16% Y/Y to $32.1 billion. Considering that the latest data shows that the eCommerce market is expected to grow at a double-digit CAGR in the coming years, it’s likely going to make it possible for Amazon to meet its expectations in the long run.
At the same time, the company’s Amazon Web Services (“AWS”) business remained resilient in recent months, and in Q3 reported a 12% Y/Y increase in revenues to $23.1 billion. Considering that Taiwan Semiconductor (TSM) recently improved its outlook for Q4 due to the rise in demand for data chips, while market data suggests that the cloud market will be growing at a CAGR of 16.4% until 2028, it’s likely that AWS will continue to grow at a decent rate for years to come as well.
What’s also important to note is that the advertising revenues grew at an impressive rate of 26% and stood at $12.06 billion in Q3, as the company continues to scale its advertising services and attract new advertisers to its platform. Last year, I noted how Amazon is likely to disrupt the Meta Platforms (META) – Google (GOOG) duopoly in the digital advertising market, and the results from Q3 suggest that that’s indeed likely to be the case in the future. Add to all of this the fact that the digital advertising market is expected to grow at an aggressive rate in the coming years as well and it becomes obvious that Amazon’s growth in the advertising business is far from over.
Going forward, there are reasons to be optimistic about the company’s performance in Q4, as the company expects to generate around $160 billion to $167 billion in revenues in the next (current) quarter. However, the Street expects Amazon to generate $166.57 billion in revenues in Q4, which is at the top of the company’s guidance, and there are risks that the next earnings report won’t be as impressive as the current one.
Risks To Consider
There are several major risks that are associated with Amazon, which made me downgrade my rating. The first risk, which is also outside of the company’s control, is the rise of macroeconomic threats that are more than likely to outweigh most of the growth opportunities that were described above. Even though the U.S. economy performed great in Q3 and will likely keep the momentum going into Q4, there’s a possibility that the situation could worsen later on and prompt investors to look for safer assets to invest in. We already saw this happening at the start of 2022, when there was a rebalancing of portfolios from growth to value as a result of the rise of macroeconomic risks.
Considering that inflation once again started to rise and we already saw M/M CPI increases in recent months, it becomes hard to imagine how the Fed will reach its 2% inflation target anytime soon without raising more rates. The resilience of the American economy in the last few months along with the recent strong jobs report are likely to encourage the Fed to increase rates once again later this year and keep them higher for longer. Add to all of this the potential rise in oil prices due to the rising geopolitical tensions in the Middle East, and it becomes harder to justify Amazon’s current valuation in such an environment.
Let’s not forget that currently Amazon trades at over 50 times its forward earnings, while the sector median forward P/E ratio is only ~14x. It also has a significantly greater valuation than its Big Tech peers. While the company has been trading at greater multiples in the past, the current economic environment is completely different than it was back in 2021, when the rates were lower than today.
At the same time, the appreciation of Amazon’s shares and shares of other big-name stocks in recent months was possible in large thanks to the AI-backed market rally that helped the Big Tech shares reach new records. As this AI-backed rally starts to lose momentum and macro risks once again begin to drive the narrative, it makes it hard to see how Amazon will be able to greatly appreciate from the current levels in the short term. Even Amazon’s peers like Microsoft (MSFT) and Meta Platforms (META), which reported strong earnings results earlier this week, quickly lost momentum as macro issues could once again negatively affect their performances in the following quarters.
As a result of this, I believe that the sentiment is changing, and Amazon’s shares are unlikely to significantly appreciate anytime soon. Back in May, I made a DCF model, which assumed that Amazon would be growing its revenues at a double-digit rate in the following years, and it showed that the company’s fair value was around $103 per share. Considering this, I’ll likely change my Amazon stock rating back to BUY once it gets closer to that level or if the macro risks subside in the future, as there’s little margin of safety at the current market price of ~$120 per share.
The Bottom Line
Amazon is without a doubt a great company that has the potential to continue to grow in the future thanks to its dominant position in the eCommerce and cloud fields, and thanks to the growth of its advertising business that has the potential to disrupt the Meta-Google duopoly.
However, macroeconomic risks, which are outside of the company’s control, are likely going to prevent its shares from significantly appreciating in the short term. That’s why I’m downgrading my rating, since not only does Amazon benefit the most from the better economic environment thanks to its size, but it also suffers greatly once the conditions change and the forces that were behind its rise in recent quarters are starting to lose their momentum.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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