Amazon shares have strengthened 53% since the beginning of the year on expectations of improved operating and net margins on the back of a low base last year due to the “fine-tuning” of operational processes (staff reductions, optimisation of logistics capacity, other expenses).
We believe that the expectations for improved performance are already largely reflected in the stock’s prices, and we see the possibility of a correction in the near term. The company’s revenue growth rate this year may remain within 10%, which is not much for Amazon; the market capitalisation is also under pressure from the renewed rise in US government bond yields in May. We estimate that the stock looks 29% overvalued, and current levels offer a good time to take profits.
Since the note dated 24 January 2023, Amazon shares are up 34% and in our estimation, current levels offer a good time to take profits. We downgrade the rating from Hold to Sell with a $99.24 target price on Amazon shares.
Amazon is one of the largest e-commerce sellers in the world. The company sells its own goods and provides services to third-party sellers to sell their goods. In addition, Amazon is a major player in the market of cloud solutions, owns the popular streaming platform Twitch, creates its own electronics and shoots shows and films for the subscription service Amazon Prime Videos.
Amazon will report Q2 2023 results on 26 July. The marketplace expects revenue to improve 8.5% YoY to $131.5bn, net income to almost double to $3.6bn, up from $1.87bn in the same period a year earlier.
Amazon’s long-term prospects look good: the company relies on several revenue sources, including high-margin IT services and advertising. However, in 1Q23, the company’s cloud division (AWS) growth rate slowed to 16% YoY, the segment’s lowest ever. At the time, management noted that it expects the slowdown to continue in Q2.
Following the report, investors will gauge management’s tone on the outlook for the largest segment by revenue (online commerce), the marginal and fast-growing advertising and cloud computing segments. Cost control remains an important topic.
We calculated the fair value of Amazon shares using the discounted cash flow method. We estimate that the stock is trading at a 29% premium to its fair valuation.
Amazon is a growth company, trading at high traditional multiples. Amazon has posted annual revenue growth of 30% on average since 2000, which has earned its stock a place among “growth stocks,” allowing it to trade at high multiples. Due to the slowdown in the business, we believe lower multiples compared to past values are justified.
We note that Amazon is developing interesting and innovative products and services that could give a boost to revenue (Project Kuiper satellite internet, Amazon Healthcare services) and market valuation of the company’s capitalisation.
Prices and other market data are as of the time of preparation of the material released on 10.07.2023.
