Amazon (NASDAQ:AMZN) has fallen from grace in spectacular fashion. AMZN stock has struggled from the moment founder Jeff Bezos stepped down from the CEO role in July 2021. But it’s not just Amazon’s share price. Profits are down, the retail business is in major trouble, and worker relations have reached a boiling point as laborers start to unionize.
Not long ago, people were speculating about when Amazon might hit a $5 trillion market cap. Now, its market cap is close to falling back below $1 trillion.
Are things really as bad for the online retail giant as the market seems to think? Unfortunately, yes. Amazon faces major hurdles However, it may not be entirely bad news for the stock going forward.
Let’s take a look at the good, the bad and the ugly for Amazon and AMZN stock.
| AMZN | Amazon | $106.22 |
The Good: AMZN Stock Valuation Is Far More Reasonable
Last year, Amazon’s major operational problems hadn’t yet come into stark relief. Yet, there was a clear reason to avoid AMZN stock: Shares were brutally expensive.
At its peak, AMZN traded for more than 65x earnings, 50x cash flow and 30x EV/EBITDA. Those are eye-popping numbers for a firm that is already as large and mature as Amazon is. When you pay that sort of multiple, everything has to go right to earn good returns. Clearly, many things have not gone right for Amazon in 2022.
Now, however, the stock’s valuation is much more reasonable. To be fair, the P/E multiple looks even worse on a trailing basis as profits have now plunged. But, assuming Amazon can get back on track, it is trading at less than a 40x multiple based on 2023 earnings and a 27x multiple based on projected 2024 earnings. Those are much more down-to-earth numbers.
Shares are also at just 19x EV/EBITDA now, and Amazon’s valuation looks more appealing compared to future cash flow projections as well.
The Bad: AMZN Stock Split Made No Difference
Amazon’s long-awaited 20-for-1 stock split brought shares down from an unwieldy level above $2,000 per share down to just over $100 now. This should make AMZNstock more approachable for retail investors. It also makes it more affordable to trade the company’s put and call options, which previously had gigantic premiums.
However, AMZN stock was already well off its high of nearly $4,000 per share when the split occurred on June 6. While a stock split changes nothing about the underlying company, it’s possible Amazon attempted to time its split to boost investor sentiment and bolster its stock price. If that was the case, it clearly failed.
After a brief pop in early June, AMZN stock has now sunk nearly 15% over the past two weeks and sits just 5% above its 52-week low.
The Ugly: Crises Abound for Amazon
In addition to the stock split failing to alter Amazon stock’s downward technical trajectory, the company faces problems on multiple fronts.
The retail industry is having a difficult time right now, and Amazon is caught in the middle of the storm. The company is showing negative profit margins in North America, to say nothing of international markets. It is being slammed by unionization drives, sharply higher wages, higher freight and fuel costs and product shortages. The list goes on and on.
It’s not just costs, either. With the Federal Reserve raising interest rates at an aggressive clip, inflation raging and recession fears mounting, consumer demand is faltering. Consumer sentiment readings hit a record low in June. If something doesn’t give, this year’s holiday season could be a bust.
Even Amazon’s vaunted web services business could see a slowdown. Layoffs and downsizing are now dominant trends in Silicon Valley. Startups are in survival mode, and companies in survival mode aren’t in a rush to spend more on cloud hosting. Don’t be surprised if Amazon Web Services’ growth rate decelerates dramatically in the months ahead.
The Bottom Line on AMZN Stock
I used to have a negative view of Amazon due to its overvaluation. That’s no longer the case. With AMZN stock down 36% year to date, shares are far more reasonably priced today.
Rather, the question for potential shareholders is, how concerned are you with the company’s next 12 to 24 months? The retail environment is likely to go from bad to worse before things start to get better. Meanwhile, the previously unstoppable AWS machine is likely to see slower growth.
The easy way to play this would be to revisit AMZN stock in 2023 if things start to turn around. But for real knife-catchers, shares might be worth a shot once they drop below $100 in the coming days or weeks.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
