Will Amazon Stock Recover?

Will Amazon Stock Recover? With the rollercoaster that Amazon has been on lately, how low could it go?

After hitting all-time highs during the pandemic, Amazon stock has steadily decreased during 2022, falling 46% year-to-date.

Despite the decline, many investors view this as a short-term setback and believe that Amazon’s stock prices will eventually bounce back. Are they right?

Why Did Amazon Stock Fall?

Multiple factors have contributed to Amazon’s recent share price decline.

The downturn in the global economy

The global economy started to slow down in early 2022, leading to decreased consumer spending. This has directly impacted Amazon’s bottom line and could be seen in their third-quarter financials.

Amazon’s net income significantly dropped from $3.2 billion in the previous year’s third quarter to only $2.9 billion this quarter.

Following this slowdown, Amazon management projects a more modest fourth-quarter revenue of around $140-$148 billion, which is lower than the $155 billion forecast by analysts.

Threat of regulations

Amazon has also been subject to increased scrutiny from the US and EU governments as of late.

In particular, the company faces potential antitrust regulations that could significantly restructure Amazon’s businesses.

Some particular regulations would disrupt Amazon’s ability to deliver one or two-day shipping to its Prime members. As one of its main competitive advantages, it could be a significant blow to its e-commerce segment.

Inflation

The e-commerce segment is highly dependent on consumer purchasing power, and an increase in prices could lead to less spending and slower growth.

With trillions of dollars pumped into the economy by government stimulus and previously Fed quantitative easing, inflation is becoming a permanent risk.

Prime Day, which has traditionally been one of Amazon’s biggest sales days with discounts on multiple products, saw mediocre sales this year compared to previous years. 80% of shoppers pointed towards inflation as one of the main reasons why they did not purchase any items on Prime day.

Will Amazon Stock Recover?

Some of the reasons that could lead to an eventual rebound are:

Innovation and expansion

Despite its current obstacles, Amazon continues to innovate and expand its business operations. The company has recently invested heavily in cloud computing, artificial intelligence, and entertainment.

These ventures include acquiring MGM, setting viewing records for their Thursday night football program, and their blockbuster series Lord of the Rings. By investing in these new businesses, it welcomes new customers into the Amazon ecosystem and expands its reach to different markets.

Organic growth of the e-commerce sector

Despite inflation and regulatory concerns, e-commerce is still a growing sector. With the growth of 5G networks and increasing internet penetration, more people are shopping online than ever.

Global e-commerce sales are expected to increase by 56% from $5.2 trillion in 2021 to $8.1 trillion by 2026. This growth in e-commerce has been exemplified by Shopify stock rising 11% this past month.

Amazon’s market share in this sector should continue to increase over time as customers turn to it for convenience and competitive pricing.

AWS expansion

Amazon Web Services (AWS) has become an increasingly important part of Amazon’s business model, contributing to more than 14.5% of its total revenue.

The AWS segment is crucial because, unlike Amazon’s eCommerce segment, where margins are low (Amazon overall has a 2.25% profit margin) due to competition and pricing pressures, AWS offers higher margins due to its proprietary technology.

This segment is expected to bring in $23 billion in operating income for Amazon this year. With a high 29% margin, it is well-positioned to be a significant driver of growth in the future.

AI and Big Data

Amazon’s investments in artificial intelligence (AI) and big data have been paying off. The company has leveraged these technologies to predict customer demand better, optimize supply chain operations and reduce costs.

AI has also allowed Amazon to customize its recommendations for customers and increase the accuracy of its predictions. By making business decisions based on data, Amazon has increased efficiency and maximized its profits.

These investments are expected to increase Amazon’s competitive advantage in the e-commerce space in the future, as provides an edge over rival companies such as Walmart, who have yet to fully capitalize on AI and Big Data.

Short-term Setback?

Amazon has been one of the fastest-growing companies of the past two decades. With its rapid expansion, the company was able to offer competitive prices and diverse products, allowing it to become one of the most successful e-commerce companies in the world.

Between 2011-2021 Amazon stock was able to grow 1,588% as the company continued to introduce new products and services like Amazon Prime, Alexa, and AWS.

In the context of this consistent growth, some investors view the current downturn in Amazon’s stock prices as a short-term setback. They point to the company’s long-term potential and its ability to innovate and expand as reasons why Amazon’s stock will eventually rebound to new highs.

The long-term prospects for Amazon

Overall, it appears that Amazon’s long-term prospects remain positive despite current dips in stock price. By investing in new businesses and technological advancements, they are setting themselves up for success going forward.

Investors who view this as a short-term setback may be rewarded in the long run as Amazon continues to innovate and increase its market share of e-commerce sales. In addition, cloud computing is undoubtedly the tech industry’s future, and Amazon is well-positioned to capitalize on this trend with AWS.

When we ran the numbers, we arrived at a fair market valuation for AMZN of $118 per share using a discounted cash flow forecast analysis, suggesting about 28% upside from current levels.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.