Stock market

Is Amazon’s share price likely to fall?

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

Numbers

When a company sees a rally of more than 50%, I always start my analysis with discounted cash flow. This valuation method estimates a company’s future cash flows, and can indicate whether the market is dying out, or if there is still a good opportunity to move forward. Impressively, based on this calculation, the current share price could fall by as much as 41%.

Of course, this is not a guarantee. With so many different revenue 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), paints a clearer picture. Currently, the firm’s P/E sits at around 56 times, significantly higher than the sector average of 34 times. This may indicate that the company’s shares are trading at a premium compared to competitors. After such an extended rally, a share price that many believe is too high can lead to a sharp sell-off and a significant decline.

Limited capacity?

Amazon’s aggressive expansion into e-commerce is no match for the heady days of the past. Compared to this year, revenue is expected to decline by 20 percent during the coming year. Some analysts say the company faces increasing competition in the e-commerce space, particularly from TikTok shop, which is growing at an astonishing rate. But for me, the company’s impressive performance in other areas, such as AWS, more than hedges against any potential retail slowdown.

Another factor that 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 doesn’t need to be a priority. Instead, the company can focus on reducing costs, executing efficiently, and expanding offerings e.g Prime Video.

Overall

To me, Amazon’s share price still has a great future, but there may be some bumps along the way. The e-commerce business may have already seen its best days, but with so many other services and platforms under one roof, the firm is not far from becoming the ‘everything platform’ that many companies aspire to be. Looking for

As with many companies in the technology sector, the valuation may be high, but I feel long-term investors have a solid future with it. I will add shares next time.


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