Is Amazon’s stock price poised for a decline?

Mamut e-commerce and technology Amazon (NASDAQ:AMZN) has been attracting investors for decades. But after growing more than 50% last year amid excitement surrounding the tech sector, many will be wondering how far it can go. I want to take a closer look at this market giant and determine if there may be a few reasons to take profits in the near term.

Numbers

When a company grows more than 50%, I always start my analysis by calculating discounted cash flow. This valuation method estimates a company’s future cash flows and can indicate whether the market is getting carried away or whether there is still a good chance of further growth. Impressively, based on these calculations, the current share price may be undervalued by as much as 41%.

Of course this is not a guarantee. With so many different sources of revenue, including cloud computing, it is often difficult for investors to determine the best way to value such complex companies.

However, the price-to-earnings (P/E) ratio, which compares a company’s share price to its earnings per share (EPS), paints a clearer picture. The company’s current P/E is around 56 times, significantly higher than the sector average of 34 times. This may indicate that the company’s stock is trading at a premium compared to its competitors. After such a prolonged bull market, a stock price that many believe is too high can quickly lead to a sell-off and a significant decline.

Limited potential?

Amazon’s aggressive expansion into e-commerce doesn’t quite resemble the exciting days of yesteryear. Compared to the current year, revenue growth is expected to decline by 20% in the coming year. Some analysts say the company is facing growing competition in the e-commerce space, especially from TikTok Shop, which is growing at an astonishing pace. However, for me, impressive results in other areas of the company, such as AWS, more than buffer against a potential retail slowdown.

Another factor that I think can have a huge impact on the share price is the transition from growth to profitability. The company is currently such a colossus that expansion does not have to be a priority. Instead, the company can focus on reducing costs, efficient execution and improving offerings like Prime Video.

Generally

To me, Amazon’s stock price still has a great future ahead of it, but it may hit a few bumps in the road. The e-commerce industry may have seen its best days, but with so many other services and platforms under one roof, the company is just a step away from being the “everything platform” that so many companies want to become.

As with many technology stocks, the valuation may be high, but I believe there is still a solid future ahead for long-term investors. I will add shares at the next opportunity.

The post Is Amazon’s stock price primed for a decline? appeared first on The Motley Fool UK.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Gordon Best has no position in any of the stocks mentioned. The Motley Fool UK recommended Amazon. The views expressed about the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.

Motley Fool UK 2024