Let’s not sugarcoat it – Amazon’s (NASDAQ:AMZN) stock might be headed for a reality check. And if you’re thinking, “$120? That’s too low” – think again. History says otherwise. And current risks? They’re stacking up fast. Investors expect Amazon to grow, and expand its margins during the process. And that’s exactly at risk right now. And the concern gets compounded by the fact that Amazon has not been able to beat S&P 500 cumulatively in the last 5 years – surprised? Unless you are an avid market follower, you wouldn’t have guessed this about a company of Amazon’s caliber and scale. But also check out You Missed A 3,000% Profit Opportunity On The S&P 500.
This is why it is important to move past the business, brand and size – and look at the underlying numbers, which is what we do in our High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.
Questionable Valuation When You Look At Other Mag 7 Companies
Amazon trades at a PE ratio of 32. Sounds fine on paper, until you look around.
Both Growth & Margins At Risk
Amazon’s operating margins have indeed improved to 10.8% in the last 12 months vs a 3-year average of 6.5%. That’s good. But here’s the issue: the market seems to be pricing in even more improvement. And that’s where the real risk is. Because in the current macro environment – inflation, higher labor costs, unpredictable consumer demand – expecting margins to keep climbing might be a stretch. Let’s dig in more:
- Tariffs:
- Over 70% of products sold on Amazon come from China.
- New tariffs mean higher costs, fast.
Amazon doesn’t have room to absorb cost so choices are: pass on cost to consumers which can affect growth, or shift supply chain elsewhere which can be slow, costly, and limited endeavor
- AI Spending:
- Amazon plans to spend over $100 billion on AI infrastructure in 2025
- Wall Street hasn’t been thrilled with how AI spending has translated to profit so far. This could be another margin drag and a big one at that.
Amazon Does Crash, And Badly
This is not a stock that glides through storms. Amazon tends to fall hard in market downturns.
- 2022 inflation crash? -54%
- COVID panic? -23%
- 2008 financial crisis? -65%
It’s done it before and can do it again. And if something snaps – a market correction, tariffs biting deep, or AI spending flopping – $120 isn’t a dramatic call. It’s a plausible scenario.
Investing in a single stock – no matter how well the business is run – can be risky. We diversify away this risk while maintaining upside exposure in Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
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