{"id":5721,"date":"2023-10-26T21:07:45","date_gmt":"2023-10-26T21:07:45","guid":{"rendered":"https:\/\/infundpros.com\/news\/amazon-q3-time-to-sell-rating-downgrade-nasdaqamzn\/"},"modified":"2023-10-26T21:07:46","modified_gmt":"2023-10-26T21:07:46","slug":"amazon-q3-time-to-sell-rating-downgrade-nasdaqamzn","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=5721","title":{"rendered":"Amazon Q3: Time To Sell (Rating Downgrade) (NASDAQ:AMZN)"},"content":{"rendered":"
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Even though Amazon.com, Inc.<\/strong> (NASDAQ:AMZN<\/span>) reported decent earnings results for Q3, there\u2019s a risk that its shares could depreciate in the coming months due to the rise of macroeconomic risks that are likely to outweigh most of the growth opportunities. While most of my bullish <\/span>recommendations<\/span> played out well in the last year except for the last one, I think now is the time to downgrade my rating as some of the risks, which are outside of Amazon\u2019s control, could have a negative impact on the company\u2019s performance in the short term.<\/span><\/p>\n

AMZN Q3 Was A Success<\/strong><\/h2>\n

Earlier today Amazon <\/span>reported<\/span> its Q3 earnings results, which didn\u2019t disappoint the company\u2019s shareholders. Amazon\u2019s revenues during the quarter were $143.1 billion, up 12.6% Y\/Y, and above the estimates by $1.54 billion. At the same time, the company\u2019s EPS stood at $0.94 in Q3.<\/span><\/p>\n

Such decent results were achieved in part thanks to the growth of the overall eCommerce market, which was boosted by the impressive U.S.<\/span> GDP<\/span> growth rate of 4.9% in Q3. Amazon\u2019s report shows that North American sales were up 11% Y\/Y to $87.9 billion, while the international sales increased by 16% Y\/Y to $32.1 billion. Considering that the latest data shows that the eCommerce market is <\/span>expected<\/span> to grow at a double-digit CAGR in the coming years, it\u2019s likely going to make it possible for Amazon to meet its expectations in the long run.<\/span><\/p>\n

At the same time, the company\u2019s Amazon Web Services (“AWS”) business remained resilient in recent months, and in Q3 reported a 12% Y\/Y increase in revenues to $23.1 billion. Considering that Taiwan Semiconductor (TSM) recently <\/span>improved<\/span> its outlook for Q4 due to the rise in demand for data chips, while market data <\/span>suggests<\/span> that the cloud market will be growing at a CAGR of 16.4% until 2028, it\u2019s likely that AWS will continue to grow at a decent rate for years to come as well.<\/span><\/p>\n

What\u2019s also important to note is that the advertising revenues grew at an impressive rate of 26% and stood at $12.06 billion in Q3, as the company continues to scale its advertising services and attract new advertisers to its platform. Last year, I <\/span>noted<\/span> how Amazon is likely to disrupt the Meta Platforms (META) – Google (GOOG) duopoly in the digital advertising market, and the results from Q3 suggest that that\u2019s indeed likely to be the case in the future. Add to all of this the fact that the digital advertising market is <\/span>expected<\/span> to grow at an aggressive rate in the coming years as well and it becomes obvious that Amazon\u2019s growth in the advertising business is far from over.<\/span><\/p>\n

Going forward, there are reasons to be optimistic about the company\u2019s performance in Q4, as the company <\/span>expects<\/span> to generate around $160 billion to $167 billion in revenues in the next (current) quarter. However, the Street expects Amazon to generate $166.57 billion in revenues in Q4, which is at the top of the company\u2019s guidance, and there are risks that the next earnings report won\u2019t be as impressive as the current one.<\/span><\/p>\n

Risks To Consider<\/strong><\/h2>\n

There are several major risks that are associated with Amazon, which made me downgrade my rating. The first risk, which is also outside of the company\u2019s control, is the rise of macroeconomic threats that are more than likely to outweigh most of the growth opportunities that were described above. Even though the U.S. economy performed great in Q3 and will likely keep the momentum going into Q4, there\u2019s a possibility that the situation could worsen later on and prompt investors to look for safer assets to invest in. We already saw this happening at the start of 2022, when there was a rebalancing of portfolios from growth to value as a result of the rise of macroeconomic risks.<\/p>\n

Considering that inflation once again started to rise and we already saw M\/M CPI increases in recent months, it becomes hard to imagine how the Fed will reach its 2% inflation target anytime soon without raising more rates. The resilience of the American economy in the last few months along with the recent strong jobs report are likely to<\/span> encourage<\/span> the Fed to increase rates once again later this year and keep them higher for longer. Add to all of this the potential rise in oil prices due to the rising geopolitical tensions in the Middle East, and it becomes harder to justify Amazon\u2019s current valuation in such an environment.<\/span><\/p>\n

Let\u2019s not forget that currently Amazon <\/span>trades<\/span> at over 50 times its forward earnings, while the sector median forward P\/E ratio is only ~14x. It also has a significantly greater valuation than its Big Tech peers. While the company has been trading at greater multiples in the past, the current economic environment is completely different than it was back in 2021, when the rates were lower than today. <\/span><\/p>\n

At the same time, the appreciation of Amazon\u2019s shares and shares of other big-name stocks in recent months was possible in large thanks to the AI-backed market rally that helped the Big Tech shares reach new records. As this AI-backed rally starts to lose momentum and macro risks once again begin to drive the narrative, it makes it hard to see how Amazon will be able to greatly appreciate from the current levels in the short term. Even Amazon\u2019s peers like <\/span>Microsoft<\/span> (MSFT) and <\/span>Meta Platforms<\/span> (META), which reported strong earnings results earlier this week, quickly lost momentum as macro issues <\/span>could<\/span> once again negatively affect their performances in the following quarters.<\/span><\/p>\n

As a result of this, I believe that the sentiment is changing, and Amazon\u2019s shares are unlikely to significantly appreciate anytime soon. Back in May, I made a <\/span>DCF model<\/span>, which assumed that Amazon would be growing its revenues at a double-digit rate in the following years, and it showed that the company\u2019s fair value was around $103 per share. Considering this, I\u2019ll likely change my Amazon stock rating back to BUY once it gets closer to that level or if the macro risks subside in the future, as there\u2019s little margin of safety at the current market price of ~$120 per share.<\/span><\/p>\n

The Bottom Line<\/strong><\/h2>\n

Amazon is without a doubt a great company that has the potential to continue to grow in the future thanks to its dominant position in the eCommerce and cloud fields, and thanks to the growth of its advertising business that has the potential to disrupt the Meta-Google duopoly.<\/span><\/p>\n

However, macroeconomic risks, which are outside of the company\u2019s control, are likely going to prevent its shares from significantly appreciating in the short term. That\u2019s why I\u2019m downgrading my rating, since not only does Amazon benefit the most from the better economic environment thanks to its size, but it also suffers greatly once the conditions change and the forces that were behind its rise in recent quarters are starting to lose their momentum.<\/span><\/p>\n

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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