Amazon (NASDAQ:AMZN) stock finds itself struggling after years of growth. Profits keep increasing and the company continues to find success in new ventures. However, the recent drop in Amazon stock may indicate that Wall Street has become less fascinated with Amazon’s successes.
Given the changing perception about Amazon and the equity’s high multiple, I would caution against buying into the price decline.
Can Amazon Keep Topping Itself?
For a time in the late 1980s, a talk-show host named Morton Downey Jr. enjoyed a brief period of popularity when his show premiered in 1987. Downey would draw in viewers with increasingly outrageous antics. However, viewers eventually tired of the shenanigans, and the show had left the airwaves by 1989.
Downey later said that producers put pressure on him to “top himself” every night. After trying to become more outlandish, he said that “pretty soon, you work your way to the edge of the trampoline and fall off.”
One gets the feeling that Amazon may have tried to top itself in the same manner. From its humble origins as an online bookseller, it later moved into “selling everything.” Early in the decade, it began to make a name for itself outside of retailing.
Amazon Web Services (AWS) ushered in the cloud computing industry. Now, the Amazon Echo and the Amazon site itself has become an ad platform.
Successes Drove Amazon Stock to Outrageous Highs
To Amazon’s credit, many of its ventures have brought wild success. Its sales volumes inspired fear in retail stocks such as Costco (NASDAQ:COST) and Walmart (NYSE:WMT) in recent years.
Amazon also owns the most successful cloud computing platform, accounting for the majority of company profits. The move into online ads has stoked anxiety for investors in Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB). Also, the competition between cities to lure HQ2 brought the company billions of dollars in tax breaks.
As a result of these achievements, Amazon stock traded in what I elsewhere called a “vision premium.” Until recently, its price-to-earnings (PE) ratios soared well into the triple-digits. Also, while longer-term growth estimates have fallen, analysts still forecast an average growth rate of 44.3% per year for the next five years.
Amazon Stock Still Overvalued
However, we also see indications that AMZN has reached the proverbial “edge of the trampoline.” After briefly attaining the world’s second-largest market cap, Amazon stock has plunged nearly 23% from its 52-week high.
In its previous earnings report, AMZN fell short of revenue estimates. It probably also did not help that Singles Day netted about $24.3 billion in sales for Alibaba (NYSE:BABA). This amounts to around six times as much revenue as AMZN brought in on Prime Day in July.
Also, even with the decline in Amazon stock, the PE stands at around 80. Moreover, analysts expect this year’s growth rate of 334.2% to fall to 34.2% next year.
While I find it difficult to speak negatively about 30+% growth, it shows that Amazon can no longer top itself at an ever-increasing rate. I expect Amazon to continue growing and stoking fear in its peers. However, I do not think buyers should pay 80 times earnings.
The Bottom Line on AMZN Stock
The recent drop in AMZN does not give investors enough reason to buy this equity. Amazon has found success in a wide variety of areas. Over the last few years, it has also stoked a great deal of fear in a wide range of peers.
Still, success and fear may cease to drive AMZN stock. AMZN trades at an elevated multiple despite the recent stock price declines. Furthermore, a sense of Amazon fatigue may have emerged as the company’s presence in people’s lives continues to grow.
With its moves into ever greater fields of endeavor, the public has possibly become less impressed, and maybe a little scared.
In short, this may have taken Amazon closer to the edge of the trampoline. Perhaps the time has come to stop jumping.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
