Amazon’s Stock Is Booming Despite The Coronavirus Pandemic, But What’s Next?

After an almost 25% rise in Amazon‘s (NASDAQ:AMZN) stock since the beginning of 2020, at the current price of around $2,400 per share, we believe Amazon’s stock offers limited upside potential once the market shakes off the impact of the coronavirus outbreak. Despite disruptions in its supply chains globally, Amazon has benefited over recent weeks as millions of people in the U.S. and abroad are turning to online marketplaces to fulfill their essential requirements like groceries, food, toiletries, and medicines. In these uncertain times where companies are cutting pays and jobs, Amazon has raised pay and hired more than 100K warehouse and delivery workers – and is planning to bring in more as it struggles to fulfill the huge, unexpected rise in demand.

However, given the steady rally in its price over recent weeks, we believe that post the coronavirus crisis, Amazon’s stock is likely to underperform peers like Walmart as well as the broader market. Our dashboard What Factors Drove 99% Change In Amazon’s Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

The stock price rise from $1169 at the end of 2017 to $1847 at the end of 2019 is justified by the roughly 60% increase in Amazon’s revenues from 2017 to 2019. This was aided further by an improvement in Net income margin from 1.7% in 2017 to 4.1% in 2019. As a result, the net income figure rose from $3 billion in 2017 to $11.6 billion in 2019. With the share count increasing marginally, Amazon’s EPS swelled 271% in 2 years.

Understandably, the rise in EPS was accompanied by a reduction in Amazon’s P/E multiple from 185x at the end of 2017 when it finally turned profitable to 79x at the end of 2019. However, the multiple has risen to almost 100x now – a 26.5% jump in four months due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdowns in various cities across the globe, which has affected industrial and economic activity. This is has forced consumers to concentrate on essential spending and improve social distancing, which in turn has turned them towards online marketplaces like Amazon. Amazon’s stock is up by about 16% since January 31, after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 15.2%. Moreover, more than 60% of AMZN’s total revenue comes from the US region, which has been the worst impacted by the outbreak. Hence, the focus of consumer spending on essentials through online marketplaces is boosting the company’s stock.

We believe Amazon’s Q1 results will confirm the trend in revenues. It is also likely to accompany a clearer Q2 as well as FY’20 guidance. However, even if there are signs of abatement of the crisis by the time Q2 results are announced, the company’s stock could see a limited upturn. With a 16% rise in its stock price since January 31, 2020, Amazon has out-performed Walmart (+13%) and the S&P 500 (-15.2%). In the current scenario, we believe Amazon’s stock is likely to remain around its current levels, with a limited upside post coronavirus.

View our dashboard analysis Coronavirus Trends Across Countries, And What It Means For The U.S. for the current rate of coronavirus spread in the U.S. and forecasts on where it could be headed, based on comparison with other countries. Our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture of historic crashes and how the sell-off during early March compares.

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