Amazon stock (AMZN) - Get Report has not gone anywhere in over half a year. Since reaching an all-time high in September 2020, shares have declined about 9%, now trading much closer to correction territory than to the stock’s historical peak value of $1.8 trillion.
Interestingly, Amazon stock’s lack of firepower has been inconsistent with the company’s outstanding performance throughout this pandemic period. If Marty McFly or Dr. Brown from Back To The Future had shown me Amazon’s fourth quarter 2020 and first quarter 2021 financial results six months ago, I would have bet that the company’s equity would be worth north of $2 trillion by now.
Of course, I would have been wrong. I explain why below.
What has gone wrong?
Let me be clear: it would be unfair to say that Amazon stock has not been a winner lately. Sure, shares have been stuck in the mud for seven months. But the chart below shows how far and how fast the company’s equity value has climbed recently: from $350 billion five years ago to $1.6 trillion now.
The malaise of September 2020 to today can be probably blamed, first and foremost, on the stock’s impressive run of March through September of last year. The market seems to have anticipated Amazon’s strong performance during and even after the year of the stay-at-home economy.
Now, as the US economy slowly reopens, a few things have started to happen – none of which is particularly good news for Amazon and its stock:
- The market has fully embraced what is known as the “cyclical rotation”: preference for growth stocks that can perform better in different macroeconomic environments has shifted to sectors that tend to outperform primarily during periods of economic recovery (banks, energy, travel and leisure, small cap, etc.).
- Some experts have started to doubt that Big Tech companies will perform as well in the next few years, now that consumers are expected to spend less money inside their homes (online shopping, video streaming, etc.) than they did in 2020.
- Inflation fears have been mounting and culminated in expectations for a multi-decade high of 2.7% between now and 2026. While Amazon’s financial results might not be particularly at risk from higher consumer prices (revenues could even benefit from it), the perceived value of a growth stock in the face of higher inflation and yields tends to decrease.
Amazon and the road to $2 trillion
Back to the original question: when will Amazon stock finally reach $2 trillion? Clearly, this is not an easy question to answer, because the future is uncertain. But the Amazon Maven proposes the following model that investors can use to think about the timeline:
- From a business fundamentals perspective, Amazon stock can reach the $2 trillion market cap if or once growth expectations materialize. For example, consider the math: AMZN currently trades at a 2021 forward price-earnings ratio of 58 times. Without any compression to valuation multiples, Amazon would be worth $2 trillion once annual EPS reached $70. Analysts currently expect the company to deliver earnings at these levels as early as 2022. Therefore, Amazon could very well reach the market cap milestone this time next year.
- From a valuation perspective, Amazon stock would be worth $2 trillion if its forward P/E merely expanded from 58 to 73 times. One or a combination of the following would probably need to happen: (1) an increase in long-term earnings and/or cash flow growth expectations; (2) a drop in interest (i.e. discount) rates; (3) a market-wide rally that is fueled by increased investor optimism. To be honest, I think that valuation expansion is the least likely path to $2 trillion.
- From a chart analysis perspective, Amazon stock could get to $2 trillion if share price breaks through this $1.7-to-$1.8 trillion market cap resistance. The stock has been range-bound for several months. Investors would probably feel more comfortable investing in AMZN once they saw momentum develop once again.
In your opinion, when will Amazon stock finally reach the $2 trillion market cap milestone? Leave your vote below!
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)