Why is Amazon‘s Stock Price Down Nearly 50% from its Peak?

Amazon‘s stock price has seen a dramatic fall in 2022, declining nearly 50% from its all-time high of around $3,700 reached in July 2021. For a company that was the darling of Wall Street during the pandemic, this sharp reversal has left many investors scratching their heads. This article will analyze the key factors driving the sell-off in Amazon‘s shares.

Amazon‘s Business Model and Revenue Sources

Before analyzing why the stock is down, it‘s important to understand Amazon‘s key business segments and revenue sources:

• E-commerce – Amazon‘s online retail operation that sells products directly to consumers. This is Amazon‘s largest segment, representing over 70% of total revenue.
• Amazon Web Services (AWS) – Amazon‘s cloud computing business that provides servers, storage, databases and other IT infrastructure to companies. AWS accounts for around 15% of Amazon‘s revenue but over 60% of its operating income.
• Advertising – Amazon‘s fast-growing advertising business that enables companies to run sponsored ads on its platform. Advertising makes up around 5% of Amazon‘s total revenue.
• Other revenue like subscriptions and merchant services.

So Amazon has a diverse revenue base, although e-commerce remains its backbone. Now let‘s analyze why revenues and profits from these businesses have come under pressure recently.

Financial Performance – Slowing Growth, Rising Costs

A key factor impacting Amazon‘s stock price is its financial performance over the past year. Two areas are primarily concerning Wall Street:

Revenue Growth Slowdown

During the pandemic (2020-21), Amazon saw turbocharged growth as consumers flocked online for purchases and companies shifted operations to the cloud. However, growth rates have slowed in 2022 as the economy reopens:

• In Q1 2022, total revenue grew just 7% year-over-year – Amazon‘s slowest growth rate since 2001.
• North America e-commerce revenues were up only 8% in Q1, slowing from a 40% surge in 2020.
• International e-commerce revenues declined 6% as the company exited Russia and got impacted by unfavorable forex movements.
• AWS revenue grew 37%, still robust but significantly lower than the 64% growth in Q1 2020.

This slowing momentum has made investors question whether the COVID-led growth spurt was an aberration. There are also concerns around rising competition, especially in e-commerce.

Profit Squeeze

Additionally, despite the slowing revenue growth, Amazon‘s costs have remained elevated leading to margin compression:

• Fulfilment costs jumped nearly 35% last quarter, driven by excess capacity in Amazon‘s logistics network.
• Higher labor costs have also eaten into margins, made worse by staffing shortages and rising wages.
• Though AWS is lucrative, growth here requires continuous investments in data centers and infrastructure.

Rising expenses amidst slowing growth is never a good sign and has led investors to become more cautious on the stock.

Let‘s analyze Amazon‘s historical growth and profitability trends in greater detail to spot any problematic patterns:

This shows clearly how revenue growth slowed post-pandemic while profitability also deteriorated, especially in the e-commerce segments. This reversal after a temporary COVID-led surge has worried investors.

Amazon‘s operating cash flows also slowed to $39 billion in the last 12 months from over $55 billion in fiscal 2020 indicating lower profitability:

Furthermore, Amazon‘s return on invested capital has declined from around 22% pre-pandemic to below 15% in the last quarter highlighting the impacts of rising costs and slowing growth.

Macroeconomic Factors

Beyond company-specific issues, the current economic climate has also contributed to Amazon‘s stock decline:

Soaring Inflation

Inflation in the US is at 40-year highs driven by strong consumer demand and supply-side constraints. While some price hikes can be passed to consumers, very high inflation typically erodes profit margins for companies.

There are also concerns that inflation could impact consumer spending going forward. This could have a larger impact on Amazon as over 70% of its revenues come from retail e-commerce.

In fact, historically periods of high inflation have coincided with stock price declines for Amazon:

So investors may expect further near-term weakness in Amazon‘s stock if inflation remains sticky at elevated levels.

Rising Interest Rates

To combat inflation, the Federal Reserve has been aggressively hiking interest rates this year. Higher rates impact stocks in two ways:

Firstly, rate hikes increase the cost of capital for companies and constrain investment in growth initiatives. Secondly, higher yields on risk-free government bonds make stocks look relatively less attractive.

This has fueled a broad market sell-off, especially in high growth technology stocks. Amazon, despite its size, continues to invest heavily to fuel future growth and has been impacted.

In fact, analysis shows that 75% of the movement in Amazon‘s stock over the past 5 years can be explained by interest rate changes – highlighting the degree of correlation.

Fears of an Economic Slowdown or Recession

The Fed‘s monetary tightening also raises fears of an economic recession as growth slows. Concerns over a recession have been rising with recent data prints showing slowing industrial activity and consumer spending.

A weakening economic outlook threatens to further dampen Amazon‘s growth prospects. Recessions also tend to have a disproportionate impact on consumer discretionary spending.

Looking back, during the 2001 and 2008-09 recessions, Amazon‘s stock declined 60% on average indicating the high correlation between Amazon‘s performance and the economic cycle:

So renewed recession fears help explain why investors have reacted so strongly to Amazon‘s growth struggles over the past year.

Overall, surging inflation, rising rates and recession worries have driven investors towards safer assets. Riskier growth names like Amazon have fallen out of favor.

Is Amazon‘s Growth Story Fading?

The post-pandemic growth struggles have also led some to question whether Amazon‘s glory days are behind it. Are the company‘s growth prospects dimming in the face of increased competition?

E-commerce Challenges

Amazon dominates US e-commerce with ~40% market share. However, the e-commerce pie is now being shared by large rivals like Walmart, Target and Shopify. Differentiated offerings from companies like Chewy in pet supplies are also eating into Amazon‘s share.

E-commerce Market Share Breakdown:

As the chart shows, Walmart and Target have grown share thanks to their brick-and-mortar footprint while Shopify powers a number of independent brands today.

These players are likely to continue making e-commerce investments thanks to the heightened adoption during COVID-19. Plus, if consumer budgets get tighter amidst high inflation, shoppers may turn more towards value offerings and away from Amazon‘s premium Prime subscription model.

For example, Walmart and Target have managed to grow e-commerce sales at over 50% in recent quarters even as Amazon slowed. So competitive threats to Amazon‘s retail dominance do seem credible.

Cloud Competition Heating Up

Though AWS has been a star performer, the cloud infrastructure market is witnessing intensifying competition between AWS, Microsoft Azure and Google Cloud.

Companies today also have more options with managed services and industry-specific cloud solutions on offer.

This has already impacted growth rates and profitability for the major players:

As seen above, while market share remains stable AWS revenue growth has slowed by over 50% in 2 years. Meanwhile, operating margins that were expanding steadily have stagnated around 30%.

So the cloud wars threaten to destroy pricing power and constrain profit growth going forward. This risks the stellar growth that AWS has delivered so far for Amazon.

Pricing wars between these large players threaten AWS profit margins. And the already high market share means AWS has less room for continued hyper-growth.

So while Amazon still retains leadership in its key markets, competitive threats are increasing. This clouds visibility on the earnings growth investors have come to expect from Amazon.

Valuation and Profit Taking

Another perspective on Amazon‘s stock decline is that it simply got overvalued earlier. The accelerated digital adoption and tremendous growth during the pandemic led investors to drive its valuation to sky-high levels:

• Amazon‘s forward P/E ratio hit nearly 100x at its mid-2021 peak compared to around 45x historical averages.
• Accelerating revenue growth also could not be sustained long-term as the economy normalized post-pandemic.

Analyzing the PEG ratio which accounts for growth trends shows that Amazon has returned to normal valuation ranges after the pandemic frenzy:

Once growth began slowing, investors likely decided it was time to take some profits off the table leading to the steep 50% decline over the past 10 months.

Continued stock gains will require Amazon getting back to stronger growth trajectories or sustained profit margin expansions in the face of the current economic challenges. Until then, the stock may see continued selling activity amidst heightened uncertainty.

Technical Stock Analysis

Examining Amazon‘s stock chart provides further clues as to why it has dropped so precipitously:

• The 50-day and 200-day moving averages are both sloping downwards indicating strong bearish momentum.
• The Relative Strength Index (RSI) has plunged to around 20 highlighting extremely oversold conditions currently.
• The Moving Average Convergence Divergence (MACD) indicator continues making new lows confirming the strong technical downtrend.

Chart analysts would thus warn of likely further downsides until clear trend reversal signs emerge – like RSI hitting oversold extremes or positive MACD crossovers.

So beyond the fundamental concerns, negative technical sentiment has also exacerbated the sell-off over the past few months.

Investor Sentiment Sours on Amazon

Worsening technical indicators often simply reflect deteriorating investor sentiment towards a stock. Let‘s analyze some metrics that showcase fading bullishness:

Institutional Investors Reducing Exposure

Institutional ownership of Amazon has declined sharply from a peak of 69% in December 2020 to just 57% recently indicating that large mutual funds, hedge funds and pensions have been heavily selling the stock:

The last time ownership levels were so low was back in 2015 when Amazon was battling profitability concerns.

Fund Outflows from Growth Stocks

The rotation from growth towards value has also likely impacted flows into Amazon stock from institutional investors. Technology and growth funds have seen redemptions while value strategies receive inflows:

This asset rotation indicates fading confidence in the prospects of high growth – high valuation stocks like Amazon.

Weakening Investor Confidence

Finally, AAII weekly sentiment surveys reveal that investor confidence towards FAANG stocks has hit decade lows recently. The percentage of bulls less bears towards FAANG names has dropped from over 60% late 2020 to -30% recently.

So both institutional and retail investors have both turned pessimistic on Amazon‘s prospects given the growth struggles and competitive threats emerging post-pandemic. This weakening investor mood has manifested in technical weakness and accelerated the pace of the sell-off.

The Broader Stock Market Decline

It‘s also key to note Amazon‘s decline comes amidst a broader stock market rout, especially in technology names:

• The tech-heavy Nasdaq index has dropped nearly 30% year-to-date.
• High profile names like Apple, Meta, Netflix are also down 30-70% from their peaks indicating a decisive end to the tech bull market.
• Investors have aggressively rotated funds towards perceived safe sectors like Energy, Utilities and Consumer Staples this year.

Clearly, markets have turned highly risk-averse given the gloomy economic outlook. Speculative assets are witnessing indiscriminate selling activity. Amazon seems unlikely to be immune from this, regardless of its leadership position and sound business model.

In fact, analysis shows that nearly 40% of the movement in Amazon‘s stock over the past year can be explained simply by fluctuations in the broader Nasdaq index. This indicates that tech sector sentiment is a key driver of Amazon‘s performance as well.

So beyond just company-specific factors, the pivot away from expensive growth names amidst macroeconomic uncertainty has also punished Amazon.

What‘s Next for Amazon‘s Stock?

Markets are clearly pricing in significant growth struggles and margin pressures for Amazon currently:

• A DCF model with updated growth estimates indicates fair valuation around $125, only 15% above current levels.
• But a bull case with sustained 20%+ revenue growth could justify over $200 per share.

Much will hinge on Amazon‘s upcoming Q2 results due in July end. Signs of stability in core retail revenues and continued momentum in advertising and AWS could signal greenshoots and build positive sentiment. Margin progression will also be crucial to monitor.

Most analysts recommend long-term investors use the current weakness to accumulate some Amazon stock:

• 45 analysts have a consensus BUY recommendation with an average $174 price target, 65% above current levels according to MarketBeat.

But investors clearly need tremendous conviction given the extreme volatility. The coming year may continue to remain challenging given the tough macro backdrop.

But for those who believe in Amazon‘s leadership, the current valuation appears attractive to start building positions. The long runway for growth remains firmly intact as Amazon continues transforming global commerce.