How Amazon Stock Falls By 50%?

Despite significant growth in revenue and profits, Amazon’s stock (NASDAQ: AMZN) performance has raised concerns among investors due to a combination of slowing growth in its key cloud division, intense competition in artificial intelligence (AI), a high valuation, and broader economic pressures.

Over the last four years, Amazon has added $200 billion in revenue and $37 billion in net profit, with profits increasing by 112% due to expanding margins. However, during the same period, its stock has only risen by 33%, and its price-to-earnings (P/E) ratio has declined by 34%.

In 2021, Amazon traded at a high valuation multiple of 51 times earnings, reflecting expectations of future growth. Now, even with a lower multiple of 34x trailing earnings, investors question if the valuation is justified, especially as growth expectations are being tempered.

Additionally, we also have a counter scenario on Amazon Stock: Path To 2x Growth. Indeed, we believe this broad range of upside and downside potential represents a simple fact, that AMZN is a volatile stock.

That said, if you seek upside with lower volatility than individual stocks, the Trefis High Quality portfolio presents an alternative — having outperformed the S&P 500 and generated returns exceeding 91% since its inception. Separately, see – Fortinet: Buy FTNT Stock At $70, Fast?

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Core Challenges and Investor Concerns

A number of factors contribute to investor apprehension, creating potential headwinds for Amazon’s stock.

Slowing Growth in Amazon Web Services (AWS)

AWS has historically been Amazon’s primary profit engine, with estimated adjusted EBITDA margins around 45%, compared to 15% for its North American e-commerce business and 11% for its international operations. Any slowdown in this segment significantly impacts the company’s overall profitability and investor sentiment.

While Amazon’s Q2 AWS growth of 18% beat analyst estimates, it fell short of the growth rates posted by its main competitors, Microsoft Azure (39%) and Google Cloud (32%). This discrepancy is a primary reason for the stock’s recent decline, as investors worry that AWS is losing ground in the crucial cloud market. Even a high-profile partnership with OpenAI has not been enough to fully dispel these concerns.

The AI Arms Race

The boom in AI has fueled demand for cloud services, yet Amazon is perceived by some as lagging behind its rivals. Competitors like Microsoft and Google have highly integrated AI offerings (such as GPT and Gemini, respectively), which can be easier for customers to adopt. In contrast, AWS’s approach often requires more technical expertise from developers to integrate various services.

Economic Headwinds and Competition

Broader economic factors pose additional risks for Amazon:

• Macroeconomic Pressures: Inflation, potential tariffs from changing trade policies, and a cooling labor market could dampen consumer spending and increase operational costs.
• Intense Competition: Beyond the cloud, Amazon faces significant competition in e-commerce. The overall e-commerce market still only accounts for about 16% of total retail sales, suggesting a natural ceiling to growth without a physical presence.
• Profitability Uncertainty: For years, investors prioritized Amazon’s revenue growth over its slim retail profit margins. If revenue growth continues to slow, the justification for the company’s high valuation may weaken.

Historical Performance During Downturns

Amazon’s stock has shown volatility during past market downturns, at times performing worse than the S&P 500 index.

Inflation Shock (2022)

• AMZN stock experienced a peak-to-trough decline of 56.1%.
• In comparison, the S&P 500 index declined by 25.4%.

COVID-19 Pandemic (2020)

• AMZN stock saw a decline of 22.7%.
• The S&P 500’s peak-to-trough decline was 33.9%.

Global Financial Crisis (2008)

• AMZN stock fell significantly by 65.3%.
• The S&P 500 declined by 56.8% during the same crisis.

The significant 55% drawdown in 2022 suggests that a substantial decline from current levels is not unprecedented. This history of volatility, combined with a high stock price, contributes to investor caution. See – Buy or Sell AMZN Stock – for more details.

Takeaway