Analysts keep raising the price target of Amazon stock. But with the looming economic downturn, danger signals are flashing.
Amid the coronavirus pandemic, Amazon’s stock has been outstanding. As the equities market crashed, shares of Amazon (NASDAQ:AMZN) have been on the rise. Year-to-date AMZN is up by nearly 30%.
As the online retail giant gears up to report earnings at the end of this month, analysts have been falling over themselves setting new price targets for the stock. Earlier this week Jefferies Group predicted Amazon would hit $2,800 in 2021.
Not to be outdone, Goldman Sachs has now set the online retailer’s stock price target at $2,900.
With all the bullish forecasts out there, it is easy to forget that Amazon still faces enormous challenges ahead. The risks that could torpedo the rosiest of projections range from the political to the prevailing business and economic environment.
When the Democratic primaries began, Amazon came under intense scrutiny from some candidates calling for the tech giant to be split up. But the issue quickly fell by the wayside as attention shifted to the COVID-19 outbreak.
However, Amazon is once again in the crosshairs of antitrust lawmakers. The latest flare-up involves a Wall Street Journal report revealing that Amazon discreetly collected data from its marketplace sellers to inform decisions on its private-label brands.
U.S. House of Representatives Judiciary Chair Jerry Nadler called it a “troubling report.” The details have given legislators more reasons to suspect Amazon of using anti-competitive practices. The issue of competition won’t go away anytime soon as Amazon becomes indispensable in the pandemic economy.
Amazon’s cloud computing division AWS is the undisputed cash cow of the online retail giant. Despite representing just 11% of Amazon’s total revenues in the most recent quarter, AWS contributed 67% of the operating income.
AWS is currently the worldwide leader in the cloud computing market, but its competitors are growing faster.
Microsoft (NASDAQ:MSFT) Azure, which is second in global market share, grew 62% in Q4 2019. Revenues of third-placed Google (NASDAQ:GOOG) Cloud went up by 53% while AWS’ sales grew by 34% in the same period.
Although Azure and Google Cloud are coming from a lower revenue base, they still offer significant competition for AWS.
Thanks to the coronavirus pandemic, a global economic downturn is now a foregone conclusion. Last month, U.S. retail sales plunged by a record 8.7%. At the same time, online retail sales increased 3.1%–largely because of the demand caused by shelter-in-place orders.
As U.S. jobless claims eclipsed 26 million, expect to see more Americans with reduced purchasing power–a fact that will hit Amazon hard. It has so far been spared as online shopping is the only option for a lot of people. And with businesses already beginning to cut back on expenditure, AWS will be affected too.
Analysts may have painted a rosy picture for Amazon. This will further be reinforced by stellar results when the e-commerce giant reports earnings on April 30. From there, reality will start biting.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment advice from CCN.com. The authors holds no interest in any of the stocks mentioned above.
Last modified: September 23, 2020 1:53 PM