Stock Market

Caution! Amazon Stock’s Latest Rally May Not Hold

During March, Amazon (NASDAQ:AMZN) stock moved higher. That’s not surprising. Other tech stocks, including this tech giant’s main peers, performed well during the month.

In fact, some of them performed even more strongly, making the gains with AMZN stock over the past few weeks (around 10.5%) seem modest by comparison.

There are manifold reasons for this performance. Mid-March saw capital flow into tech stocks for protection from the banking crisis, kicking off a rise in price. Then, promising news, both macro and company-related (more below), helped to further extend this moderate rally.

Some believe these latest moves are a sign that it’s time to jump in. I wouldn’t hastily jump to that conclusion. Let’s dive in and see why shares are not necessarily en route to a continued rebound.

Why Sentiment Improved During March

The banking crisis may have set it in motion, but it was a spate of other developments that helped to shift sentiment for this stock back towards positive throughout the month of November. First, additional developments regarding the company’s belt-tightening efforts.

On March 20, Amazon announced it intends to lay off another 9,000 employees. This latest round of downsizing comes just two months after the tech giant’s initial big layoff announcement in January, when the company announced plans to let go of more than 18,000 employees.

Although investors reacted negatively to the news at the onset, AMZN stock picked back up shortly after that. Investors saw the cuts, particularly in cloud computing and digital advertising, as a good thing.

Towards the end of March, the resurgence in bullishness for shares continued, this time for macro-related reasons.

The stock, in tandem with the broad market, received a further lift. This was because of recent statements from the Federal Reserve that were more dovish than expected. Again though, while it may seem as if this exuberance will carry on into April, it’s far from a lock that this will happen.

Why the Latest Rally Could Reverse Course

For improving overall sentiment, it’s important to keep in mind that the market is a forward-looking indicator. With the latest news on interest rates possibly suggesting that much of the “worst” is already accounted-for, the return to a bull market may be closer than we think.

Yet while more upbeat than perhaps just a few weeks prior, investors continue to hold a “show me” view for Amazon. The economic environment may not be worsening, but the effect of prior rate hikes won’t be fully dissipated for a few quarters.

Over the next few quarters, results could continue to come in mixed-to-disappointing, additionally pressuring the stock.

Beyond just the uncertainty over near-term results, something else could weigh on AMZN from here—its valuation. AMZN continues to trade at a big valuation premium to the other stocks that make up the FAANG acronym.

Although this premium has yet to narrow, don’t assume that means the rationale behind AMZN’s rich valuation will continue to hold.

Bottom Line

The main reason Amazon trades for 71 times forward earnings, while other FAANG stocks trade for 30 times earnings or less, has to do with the perception that this company. If it takes its foot off the growth petal, will become substantially more profitable.

I’ve touched on this in past coverage of the stock and have offered a counter. There’s much to suggest that competition in both e-commerce and cloud computing could limit the extent to which Amazon’s margins will rise.

The situation may improve for AMZN stock, but don’t rush into a position. For now, it’s best instead to take a “wait and see” approach.

AMZN stock earns a D rating in Portfolio Grader.

On the date of publication, Louis Navellier held AMZN. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article.

The InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.

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