At the start of February, shares of Amazon.com, Inc. (NASDAQ:AMZN) almost hit $1,500. AMZN stock top-ticked at $1,498. Amazon had only crossed the $1,000 mark last spring, investors bid Amazon up another 500 bucks rapidly.
However, from $1,498, things got a little more stressful. By last Friday, AMZN stock had fallen to as low as $1,280/share, down almost 20% in under two weeks. The stock has bounced back on Monday, but is still well short of recent highs. Should shareholders be nervous?
Amazon surprised many observers on Monday by announcing that it is getting rid of hundreds of employees at its Seattle headquarters. On top of that, it is eliminating hundreds of additional employees at other retail-facing enterprises such as its Zappos shoes business and its Createspace publishing arm.
At first blush, this sounds like bad news. A company cutting back its headcount, especially at its home base, often is indicative of hard times. That’s not what you should conclude here, however. In this case, Amazon appears to have expanded too aggressively, and is refocusing some of its resources to other areas.
AMZN stock has grown with incredible speed, but certain divisions simply aren’t going to get as large as quickly as management may have forecast. These sorts of moves show that the company is a little more focused on growing its earnings, and it has reflected in the AMZN stock PE ratio, which is still elevated but starting to decline steadily.
Also, there may be more at work here than just cost-cutting. Remember that Amazon is currently planning out its second headquarters location.
At least at first, Amazon may need fewer permanent employees as it shifts resources to central hub number two. And given the global scale of Amazon’s ambitions, a few staff reductions in publishing and shoes – hardly Amazon’s most glamorous businesses – don’t concern me.
While Amazon announced cutbacks Monday, they were offset by new growth plans. For example, The Information reported that Amazon is planning on following in Apple Inc.’s (NASDAQ:AAPL) footsteps with their own AI processing chips.
Amazon originally intends for these to boost Alexa’s processing capacity while doing more work on-site and having to send less data back to the cloud.
But as with many Amazon initiatives, the company could have much bigger long-term plans. Remember that Amazon Web Services initially began as an effort by the company to reduce its in-house costs for cloud hosting. And look how that business has turned into one of the company’s key growth centers.
Needless to say, if you own NVIDIA Corporation (NASDAQ:NVDA), you should be watching the ambitions of companies such as Amazon and Apple that are making aggressive moves into the chip designing space.
In separate news last week, Reuters suggested that Amazon is about to lease a massive new facility in Brazil. The warehouse would quadruple Amazon’s capacity in that market, allowing them to move beyond just books into a wide category of products.
Look out if you own MercadoLibre Inc (NASDAQ:MELI) stock once Amazon gets that up and running.
With these sorts of grand announcements on a nearly weekly basis, it’s hard to see how people get worked up about a few job cuts or slowdowns at a division or two of the U.S. operations. There’s little to suggest Amazon’s growth ambitions are slowing.
AMZN Stock: Is It Worth More Than Other Big Tech Companies?
AMZN stock bears have rotated from one inaccurate thesis about the company to another. Now that the company’s EPS is shooting up, I’m sure we’ll see some new theory on why Amazon is overpriced. I will give the bears one point though.
AMZN stock is up a ton over the past year. Even factoring in the nasty start to February, shares are still up more than 60% over the past 12 months. Additionally, Amazon is now the country’s fourth-largest market cap company, trailing just Apple, Microsoft Corporation (NASDAQ:MSFT), and Alphabet Inc (NASDAQ:GOOGL).
Put another way, Amazon has been firing on all cylinders over the past year. Its growth continues to blow away expectations. And now it is starting to put up more actual accounting profits to go along with the revenues.
But when you compare Amazon to Apple, Microsoft, or Alphabet, it’s harder to make the case that Amazon is worth more than any of those other three corporations today.
Apple has its massive cash pile, Microsoft has the money-printing software business in addition to its cloud, and Alphabet, like Amazon, has its tentacles in everything while its core search business has much higher profit margins.
For Now, Amazon Is at the Market’s Mercy
I can see a case for Amazon eventually overtaking those other three companies and becoming America’s first sustained trillion-dollar market cap corporation. But we aren’t there yet. Amazon is making some great moves to finally boost profitability, along with continuing its track record for sensational revenue growth.
But all four of America’s big tech companies have been moving from success to success in recent years, the market may not be willing to crown AMZN stock as the most valuable of the four yet.
In the meantime, the volatile stock market could give Amazon owners more indigestion in the short run. Since AMZN stock trades at high PE and other valuation ratios, and offers no dividend, it is likely to experience more violent swings than its peers.
During market corrections, people suddenly rediscover the benefits of companies with strong balance sheets and sizable dividends. Lacking that investor protection, Amazon is more prone to whiplash.
That said, if you believe in the growth story, there is no reason to worry. News like layoffs will be forgotten by next week. Whereas things such as AI chips and huge expansion in Brazil will continue to advance the growth story for years to come.
But don’t forget, AMZN stock is up 60% over the past year, and the market as a whole is overbought. It might still be a bit before Amazon breaks through 1,500 for good.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.