Amazon Stock Is At An All-Time High, But Will It Grow Any More?

by Trefis Team
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After a near-70% rise since the market bottom on March 23 this year, we believe Amazon’s stock (NASDAQ:AMZN) doesn’t have any room to grow at its all-time high current price of around $3,200 per share. While the company is likely to continue to report strong revenue growth over the foreseeable future, and the increasing contribution of its high-margin Amazon Web Services (AWS) business should also have a positive impact on the profit margin, we think the current P/E multiple figure of nearly 140x is already too high – making further gains to the stock price very unlikely. Our dashboard ‘What Factors Drove 324.4% Change In Amazon Stock Between 2016 And Now? has the underlying numbers.

AMZN’s stock has increased from around $1,900 to $3,200 from March 23, 2020 – better than the S&P 500, which increased by around 41% over this period. The stock price has been on a run as Amazon benefited from millions of people in the U.S. and abroad 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. At the end of April 2020, the company had a workforce of 935K employees. In Q1 2020, the company recorded a 26% growth in revenue compared to the previous year.

Some of the stock price rise in the 2016-2019 period is justified by the fact that revenues more than doubled. Amazon’s revenues increased from $136 billion in 2016 to $281 billion in 2019, mainly driven by the contribution of Retail revenue from the North America segment. An improvement in net income margin from 1.7% in 2016 to 4.1% in 2019 helped net income swell 137% over the period.

The stock price increased during this period as margins and revenue grew, despite the P/E multiple normalizing from 150x in 2016 to 79x in 2019. The multiple has shot up again this year, though, as people are turning towards online retail and web services during the coronavirus pandemic, and the figure currently stands at an elevated level of around 140x.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to affect consumption and consumer spending adversely. Notably, Amazon’s stock is up by about 58% 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 2%. Despite the coronavirus pandemic, the company saw a 26% growth in Total revenues for Q1 2020. Amazon web services led the revenue growth recorded at 33% y-o-y, while the North America retail revenue recorded a 29% growth y-o-y. That said, lower consumer spending and consumption over the coming months could likely lead to lower demand for discretionary items as consumers will focus on essentials.

In the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to bolster market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view.

While AMZN stock doesn’t seem likely to rise further in the near term, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising

For a greater insight into the internet space, check out how Twitter and Snap have done over the last few years.

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