Is the Amazon share price primed for a drop?

The Amazon share price has been on a tear for the last year, but can this trend continue? Gordon Best takes a closer look.

| More on:

Image source: Amazon

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

E-commerce and technology mammoth Amazon (NASDAQ:AMZN) has captivated investors for decades. However, after climbing more than 50% in the last year amid excitement around the technology sector, many will be wondering how far it can go. I want to take a closer look at this giant of the market, determining whether there may be a few reasons to take profits in the near term.

The numbers

When a company sees a rally of more than 50%, I always start my analysis with a discounted cash flow calculation. This valuation method estimates a company’s future cash flows, and can indicate whether the market is getting carried away, or if there is still a good chance of more growth ahead. Impressively, the current share price may be as much as 41% undervalued based on this calculation.

Of course, this isn’t a guarantee. With so many different income streams, including cloud computing, investors often struggle to establish the best way to value such complex companies.

However, the price-to-earnings (P/E) ratio, which compares a company’s share price to its earnings per share (EPS), offers a clearer picture. Currently, the firm’s P/E sits around 56 times, significantly higher than the sector average of 34 times. This could indicate that shares in the company are trading at a premium compared to rivals. After such an extended rally, a share price that many think is too high could quickly lead to a sell-off and significant decline.

Limited potential?

Amazon’s aggressive expansion in e-commerce isn’t quite living up to the heady days of the past. Compared to this year, revenue growth is expected to slow by 20% over the coming year. Some analysts argue that the company faces increasing competition in the e-commerce space, particularly from TikTok Shop, which has been growing at an astonishing rate. But for me, impressive performance in other areas of the company, such as AWS, more than hedges against any potential retail slowdown.

Another factor I think could be a huge driver for the share price is the shift from growth to profitability. The company is now such a behemoth that expansion does not need to be the priority. Instead, the company may focus on driving down costs, executing in an efficient way, and enhancing offerings such as Prime Video.

Overall

For me, the Amazon share price still has a great future ahead, but may experience a few bumps in the road. The e-commerce business has perhaps seen it’s best days already, but with so many other services and platforms under the same roof, the firm isn’t far away from being the ‘everything platform’ that so many companies are looking to become.

As with many companies in the technology sector, the valuation may be high, but I feel that long-term investors still have a solid future with this one. I’ll be adding shares at the next opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Gordon Best has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 mouthwatering FTSE growth stocks I’d buy and hold for 10 years

Growth stocks purchased today could be the gateway to many years of capital growth and returns. Here are two picks…

Read more »

Investing Articles

Can the IAG share price really be as dirt cheap as it looks?

While most shares have recovered since the Covid days, the IAG share price is staying stuck to rock bottom. Surely…

Read more »

Investing Articles

BAE Systems shares are flying! Have I missed the boat?

Sumayya Mansoor looks into whether or not BAE Systems shares are still a good buy for her portfolio after the…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

1 heavyweight FTSE 100 share I’d buy as London retakes its crown

Some Footsie firms are extremely large, but that doesn't mean they couldn't get even bigger. Here's one such FTSE 100…

Read more »

Investing Articles

I’d buy 5,127 National Grid shares to generate £250 of monthly passive income

With a dividend yield of 6.5%, Muhammad Cheema takes a look at how National Grid shares can generate a healthy…

Read more »

Investing Articles

The FTSE 100’s newest member looks like a no-brainer to me!

This Fool explains why she sees the newest member of the FTSE 100 as a great opportunity after its recent…

Read more »

Investing Articles

Empty Stocks and Shares ISA? Here’s how I’d start earning a second income from scratch

Like the thought of earning extra cash tax free? Our writer explains what he'd do to begin earning passive income…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

No savings at 25? I’d start by investing £3k in these 3 red-hot FTSE 100 shares

Harvey Jones thinks these three FTSE 100 stocks would be a great way to kickstart a portfolio of UK shares.…

Read more »