AMazon (AMZN) stocks took a huge hit on the chin amid the market sell-off as retail stocks slid on fears of a potential consumer slump. Undoubtedly, the “Roaring 20s” seem to have slowed down, with some fearing that an economic downturn could cause even more pain in sinking retail stocks.
Without a doubt, the recent quarter that Amazon has given investors has been brutal. The company missed the boat and seems to have overinvested in the face of the slowdown in consumption.
After losing more than 42% of its value from peak to peak, many may question the company’s ability to grow in the Andy Jassy era. Jassy may be in the early innings of his tenure, but it hasn’t been an impressive start for the man who took AWS to the next level. Whether or not former CEO Jeff Bezos is inclined to take over the helm, Amazon’s growth days are likely far from over.
Of course, the consumer hasn’t been as strong this earnings season. However, don’t bundle Amazon with other fallen FAANG stars like Netflix (NFLX) or metaplatforms (Facebook), which are under enormous pressure on their business models. Rather, Amazon is navigating through temporary pressures that should ease once macro conditions normalize and consumers prepare to spend again.
Many consumers likely have more inflated balance sheets than they did before the pandemic-era shutdowns. I would look for consumers to put that money to work in discretionary spending once confidence has a chance to improve, perhaps after the worst of inflation has passed.
As the e-commerce giant’s shares heat up again, ahead of its big 20-to-1 stock split scheduled for June 6, I remain incredibly optimistic.
Similarly, on TipRanks, AMZN receives a “Perfect 10” Smart Score rating, indicating high potential for the stock to outperform the broader market.
Is Fallen FAANG Play most likely to recover? My choice would be Amazon Stock
Although the stock splits won’t generate any value, they could entice small retail investors to take a second look at the fallen FAANG stock. Essentially, this decision could highlight the undervaluation of a company that is still running at full speed.
Amazon was the most expensive FAANG stock before the sharp sell-off in the tech-focused market. Arguably, this is still the case, as it trades almost 60 times its earnings. That said, many of the headwinds facing the company appear to be more transitory in nature. Most notably, the impact of inflation and labor pressures are not factors that will weigh on Amazon forever. Things could improve considerably on both fronts in the coming quarters. It is possible that Amazon’s significant pressures on profitability will dissipate much faster than expected.
Inflationary headwinds have proven difficult for any retailer to dodge and sneak past. However, overinvestment in excess capacity exacerbated Amazon’s margin issues for its latest quarter. The company cannot point a finger at the macro environment for such a fumble.
Either way, such over-investment may be part of its long-term plan to expand its “Buy with Prime” service to other retailers. The service aims to better compete with traditional logistics service providers such as FedEx (FDX) and UPS (UPS). Undoubtedly, such a service could become another colossal segment for the company.
Such investments are not likely to be appreciated by investors anytime soon. Rate hikes are fueling demand for near-term profitability prospects and hurting companies that invest heavily in forward-looking growth initiatives.
Longer-term investors have reason to be excited as management looks to navigate tougher waters, even with a seemingly stretched price-earnings multiple and a declining consumer. As inflationary headwinds pass and consumer sentiment heals, Amazon shares could easily end up at all-time highs.
Indeed, the timely stock split could be the catalyst that rekindles investor enthusiasm.
Amazon CEO Andy Jassy has a lot to prove
Andy Jassy has some really big shoes to fill. Stock price action so far suggests that Jassy may not be able to fill them. Still, the horrible macro environment is mainly to blame for the poor performance of the last two years.
Despite recession fears and investor distaste for more expensive stocks, don’t expect Amazon to stray too far from its roots. The company has its foot on the accelerator and is willing to sacrifice some of its short-term margins to improve its longer-term fundamentals. The company is still in growth mode. Still, it may take another year for the company to get its margins back on track. Of course, this assumes that rate hikes can stamp out inflation without triggering too severe a recession.
For now, Jassy deserves the benefit of the doubt as Amazon stock looks to rebound from one of its worst falls of the modern era.
The Taking of Wall Street
As far as Wall Street is concerned, AMZN stock is looking like a strong buy. Out of 38 analyst ratings, there are 36 buy recommendations, one hold recommendation and one sell recommendation.
Amazon’s average price target is $3603.33, implying an upside potential of 47.3%. Analyst price targets range from a low of $2,800.00 per share to a high of $4,250.00 per share.
The Bottom Line on Amazon Stock
Although stock splits do not create value, they can rekindle interest and help investors rediscover the value of a name that has been overlooked. As one of the fastest growing FAANG companies, I’d say Amazon stock is looking very attractive ahead of its massive 20-to-1 split. That’s despite all the big storm clouds.
Discover new investment ideas with reliable data.
Read full disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.