Amazon.com, Inc. (NASDAQ:AMZN) shares have underperformed (albeit not as much as other equities) in FY 2022, with a year-to-date return of (24%). However, doubts have arisen about whether Amazon shares may enter a fresh upleg, particularly after the price rallied off its summer lows. I feel Amazon stock is still considerably overpriced based on profits, and the risk profile is quite unappealing. High inflation, a strong USD, and headwinds to consumer spending all pose hurdles to Amazon’s development. The e-commerce company may see topline problems resurface in Q4!

Surprise Inflation Report Set to Hurt Amazon Stock Revenue Prospects

In the first half of 2022, consumer prices edged from one record to another, indicating that investors, businesses, and consumers are not unfamiliar with the issues that high inflation rates offer. However, the recent inflation data from August, which showed an 8.3% year-over-year increase in consumer prices, suggests that inflation is not abating… possibly having a significant negative impact on Amazon’s forward topline predictions. While August inflation did not approach the heights of June (9.1%), it was more than expected: the forecast was for an 8.1% increase in consumer prices.

Inflation provides a significant difficulty for huge merchants such as Amazon, who rely on consumers’ willingness to spend money online. In addition, inflation is a significant burden for many families, and rising expenses significantly hinder consumer spending growth. Recent credit data demonstrates how terrible the situation is for many people: credit card debt increased by $46 billion (+5.5% quarter over quarter) in the second quarter as customers are obliged to borrow more money to pay for basics. Moreover, as inflation outpaced pay growth, credit card balances increased 13% in the second quarter, the highest rate in twenty years.

Rising credit card debt caused by rising consumer costs might pose a significant challenge for Amazon as well… and Amazon’s topline growth has already slowed significantly in the fiscal year 2022. Amazon reported $121.2B in sales in Q2’22, representing 7% year-on-year growth, the slowest e-commerce firm in over two decades.

Amazon AWS’s revenue growth rate has slowed over time, which is understandable given the company’s rapid expansion. What worries investors the most is that AWS’s growth rate has slowed by 5,600 basis points in the previous four quarters. Investors are now questioning if this is the start of a longer-term downturn and, if so, how far lower can its growth rates go. While this is an understandable fear, there are two reasons why investors should not be concerned just yet.

Amazon forecasted revenue growth of 13-17% in the third quarter of 2022, implying that a reacceleration of growth is feasible despite a general slowdown in the e-commerce business in 2022. Amazon stock rose more than 13% in July after reporting better-than-expected Q2’22 earnings. Despite a worsening macroeconomic climate, Amazon announced solid profits from its Amazon Web Services sector and provided a positive forecast for the third quarter. However, Amazon reported a $2.0B loss for the quarter due to a billion-dollar impairment from its equity interest in electric car company Rivian Automotive (RIVN). Nevertheless, the recession-resistant AWS company provides an advantage. Although the short-term forecast is encouraging, Amazon is expected to be badly impacted by a drop in consumer spending, which might exacerbate the company’s e-Commerce issues!

Amazon’s third-quarter prognosis was pleasantly positive, compared to other firms’ estimates, such as Walmart (WMT), which warned of inflationary pressures. Walmart’s earnings forecast has been reduced as a result of these factors. Amazon’s projection for Q3’22 is excellent, with a sales prediction of $125-130B, or 13-17% growth after adjusting for USD headwinds. While Amazon did not break out its revenue prediction by category, the AWS business is expected to account for most of this growth.

However, I believe that the current inflation data suggests that the e-commerce business may see a more severe decline… and Amazon’s revenue mix is still dominated by e-commerce.

Because e-commerce accounts for around 84% of Amazon’s consolidated revenues in North America and globally, rising inflation in the United States is expected to remain a significant challenge for Amazon’s core business. Due to mounting macroeconomic concerns, Amazon’s largest revenue category – online retail – had a 4% YOY dip in revenue to $51.1B in Q2’22 (slowing economic growth, sticky inflation). Amazon Web Services (33% YOY increase in Q2’22) and advertising services (18% YOY growth in Q2’22) are the two revenue categories that look certain to outperform in the future.

Amazon Stock is Expensive, and Estimates Are Trending Down

Amazon stock is trading at an exorbitant price, and the current situation, which includes various short-term hurdles, does not support this. Amazon is predicted to earn $2.29 per share in fiscal 2023, suggesting a P/E ratio of 55.5 X… the highest of any FAANG company. Amazon stock is much more costly than Alphabet (NASDAQ:GOOG, GOOGL) based on forwarding P/E. At the same time, Google is highly profitable, with a P/E ratio of just 17.7 X.

While I wouldn’t say I like Amazon stock because of inflation concerns and price, I adore Google because of its recession-resistant free cash flows, stock repurchase potential, and low valuation. 

Also concerning: future forecasts for Amazon’s yearly sales have declined broadly in the previous three months. Analysts have reduced Amazon’s full-year profit predictions to the downside 26 times in the previous 90 days, while there have been 15 upward revisions.

Amazon Stock Risks

The economy of the United States as a whole is in bad shape. Inflation remained high in August and is expected to impact consumer spending, which Amazon relies on. As a result, Amazon’s e-commerce company saw difficulty in FY 2022. While the estimate for Q3 is relatively positive, given the circumstances, investors can expect a slowdown in growth in Q4 as inflation and slower economic growth hit consumer spending negatively. In addition, a strong USD is still a problem for Amazon’s earnings growth. What would make me reconsider Amazon is if the e-commerce giant produced a solid Q4 topline forecast, announced a large stock repurchase or the USD fell dramatically.

Last Thoughts

In this situation, I feel it is too soon to be greedy or double down on Amazon stock. Amazon’s core e-commerce growth prospects are harmed by the August inflation data and the persistently high US currency. Aside from the risk that inflation poses to consumer spending, Amazon stock is overpriced in relation to profitability. Google offers a superior bargain, yet the company sells at a substantially lower valuation ratio than Amazon!

Featured Image: Megapixl @ Ifeelstock