Amazon Returns to the Investing Phase, Will We See a Stock Rise or a Correction?
Today, I'm focusing my analysis on the stock of Amazon.com Inc (AMZN), a company that has garnered considerable attention from investors across the globe in recent weeks. After the company reported its quarterly results in early August, there was a distinct shift in its strategy, which undoubtedly had a major impact on its stock's current and future performance [1]. *
A return to investment mode
Amazon has once again decided to shift its focus to major investments, particularly in the field of artificial intelligence. This change comes after a period of significant cost-cutting, which resulted in an increase in profitability and a dramatic rise in share price. *This return to investment mode, as expected, has raised concerns among investors who fear that increased capital spending will negatively impact the company's cash flow. [1]
Return on capital
Another important factor affecting the current perception of Amazon among investors is its relatively modest approach to returning capital to shareholders. Amazon is one of the few technologies mega-firms that does not pay dividends and makes only minimal share buybacks compared to its peers. Its $10 billion buyback program, which was authorized in 2022, was only half complete as of the end of June, with no repurchases made in the most recent quarter.
Compared with competitors that include companies such as Meta Platforms Inc, Alphabet Inc and Booking Holdings Inc, which combine share buybacks with dividend payments, Amazon is under increasing pressure to improve its return on capital. According to an analysis from Morgan Stanley, if nothing changes by the end of 2025, Amazon's net cash balance could make up about 8% of its market capitalization, which would put it among the companies with the highest cash reserves in the S&P 500. [2]
Current valuation and potential opportunities
Despite the current challenges, I've seen some investors begin to repurchase shares of technology companies, including Amazon, after recent declines. Amazon's stock is currently trading at about 28 times expected earnings, a discount to most of its Magnificent Seven peers, with only Alphabet trading at a lower multiple. *That ratio is close to the average of the Nasdaq 100 index, which trades at a multiple of 26. [3]
This suggests that Amazon may prove to be an attractive opportunity for investors who are accustomed to taking advantage of declines in tech giant stocks to buy. As James Abate noted, investors have "muscle memory" and if declines within the Magnificent Seven have proven to be buying opportunities, they will continue to do so as long as the approach works. [4]
Conclusion
Based on current developments, Amazon appears to be going through a critical period where it is refocusing its investment efforts, which may bring short-term challenges but also long-term opportunities. As an investor, I will be watching closely to see how the company handles this transition and how it approaches the issue of returning capital to shareholders. The potential for further upside in Amazon stock exists, but caution is in order in the current macroeconomic uncertainty. [5]
* Past performance is no guarantee of future results
[1], [2], [3], [4], [5] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or based on the current economic environment which is subject to change. Such statements are not guaranteeing of future performance. They involve risks and other uncertainties which are difficult to predict. Results could differ materially from those expressed or implied in any forward-looking statements.
[1] The development of Amazon's share price over the last five years: https://tradingeconomics.com/amzn:us
