Is Amazon Stock Losing Its Prime Position? 3 Factors Investors Can’t Ignore.

Stock Market

The e-commerce behemoth Amazon (NASDAQ:AMZN) has already earned a spot in many investors’ portfolios, and for good reason. The stock has gained nearly 19% since the start of the year, built off the back of a good earnings report and the broad tech rally guiding the market upwards. While Amazon has a number of secular tailwinds guiding its long-term growth, including the continued proliferation of e-commerce and cloud computing technologies, the stock’s share price performance may be running out of steam.

Below are three reasons why Amazon’s stock is a “Hold” for now.

Q1 Earnings Beat But Cloud is Not at the Center

At the end of April, Amazon released its first-quarter earnings results for fiscal year 2024. Investors were enthusiastic about the e-commerce platform’s operating income growth, which grew a whopping 200% year-over-year. This metric came as a welcome sign to investors that cost-cutting initiatives have worked. Amazon’s cloud platform, Amazon Web Services (AWS), represented 67% of the profits.

However, the cloud computing arm was not at the center of attention in terms of the company’s long-term growth prospects. Rather, advertising revenue, which recently took into account ad revenue from Prime Video, increased 24% on a year-over-year basis. Analysts expect this segment to be a significant revenue generator overtime.

AWS grew by 17% from the year-ago period. While growth for AWS did accelerate, it still looks depressed relative to prior years. Cloud spending from Amazon’s clients has noticeably slowed as interest rates and economic uncertainty rise, and the company does not seem out of the woods yet in that respect.

Benefits From AI Investments are Lacking

What should put some investors on pause when considering investing in Amazon stock is its lack of tangible artificial intelligence (AI) investments. In late March, the tech giant announced it would provide $2.75 billion of venture capital to OpenAI competitor Anthropic. While these kinds of moves are certainly welcomed, especially from a company with a balance sheet as large as Amazon’s, it’s hard not to look upon this as Amazon playing catchup.

Competitors Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, GOOGL) have poured billions into generative AI technologies, and they are already reaping benefits. Both have reported strong growth in their cloud computing arms as enterprises clamor for access to their AI computing capabilities.

Alphabet’s rise in the cloud computing space is even more interesting. Not too many years ago, investors were writing off the platform’s capabilities to effectively compete with Azure and AWS. However, thanks to the demand for AI, not only has Google Cloud been the software giant’s key growth driver, but it has also shown it can deliver significant profits.

Valuation is Above That of Big Tech Peers

Keeping the discussion grounded in Amazon’s close competitors, let’s talk about the e-commerce giant’s valuation. Amazon trades at 37.9x forward earnings, this valuation is at the higher end of its competitive peer set. Microsoft’s forward P/E, for example, trades at around 34.0x forward earnings. Meanwhile, Alphabet trades at even lower 22.5x forward earnings.

If we bring in other tech giants like Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL) or even Meta Platforms (NASDAQ:META), Amazon still trades at premium to them as well. The justification for Amazon’s higher trade multiple is unclear, especially when considering how its key competitors are outpacing it in terms of AI.

With that in mind, Amazon certainly has robust, long-term prospects but its high valuation relative to peers ultimately makes it a “Hold” in my book.

On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.

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