Why Amazon.com Stock Is Still Falling

what happened

For four long trading days in a row last week, shares of e-commerce giant Amazon.com (AMZN -3.35%) went nowhere but down. And Monday’s news isn’t looking likely to change that trend for the better.

An article on StreetInsider Monday morning revealed that investment banking advisory firm Evercore ISI had cut its price target on Amazon by $20 to $150 a share — though it did maintaining its outperform rating on the stock.

Traders responded to that move by bidding the shares down by 2.8% to around $85.40 as of 12:54 pm ET.

So what

Astute observers may notice, of course, that Amazon stock currently costs just $85 and change — so a $150 price target seems to imply the shares have roughly 75% upside (at least, according to Evercore ISI). Given that, it would be natural to wonder why Amazon’s stock sank Monday morning?

The answer goes like this: While Evercore remains convinced that Amazon is a “dislocated high quality stock” and “highly attractive for long-term investors,” in the near to medium term, the analyst has some concerns about the company. Consumer shopping for discretionary goods, said Evercore’s analyst, slowed in late October and early November — then briefly picked back up around Black Friday, only to slow again in the weeks that followed. And because Amazon depends on discretionary purchases (as opposed to staples such as food and gas) for as much as 70% to 80% of its sales, this slowdown is going to disproportionately injure Amazon’s performance.

Evercore is accordingly cutting its sales estimates for Amazon by more than 4% — and importantly, it’s cutting this estimate not just for Q4 of this year, but for 2023 and 2024 as well. And the analyst cut their estimate for Amazon’s profits by twice as much, predicting that its 2023 profits will be 9% lower than they previously forecast, and 8% lower than forecast in 2024.

Now what

That’s a whole lot of cutting Evercore is doing, and it’s quite a dramatic reduction given that the firm seems to be basing its forecasts for sales and earnings two years out on just a few months of 2022 sales data. And the reason for this is that, while Evercore began by highlighting a slowdown in consumer sales, it continued to note that the all-important cloud computing division, Amazon Web Services (AWS), also seems to be suffering from some “softness in … demand.”

For Amazon investors, this may be the most worrisome trend.

While AWS only accounts for only 13% of Amazon’s total revenues, it provides more than 74% of the company’s profits, according to data from S&P Global Market Intelligence. If the cloud segment’s growth is slowing, that dwarfs the significance of any short-term slowdown in retail sales for Amazon. Viewed in conjunction with the fact that Amazon now appears to be headed for its second straight year of negative free cash flow ($26.3 billion was burnt over the past 12 months alone), it provides more than enough reason for investors to worry about a further reduction in projections for the e-commerce giant.

Even if Evercore insists that Amazon stock is still a buy, investors may no longer be so sure about that.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.

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