Amazon Is Having Its Best Run In Years, But Should You Chase It?

Key Points

• Shares are up 60% this year. 
• Cooling inflation readings and a risk-on sentiment have fuelled the rally. 
• Valuation concerns are growing, though, and are not without reason.

With fellow tech heavyweights like Apple Inc NASDAQ: AAPL, Meta Inc NASDAQ: META, and Alphabet Inc NASDAQ: GOOGL all seeing strong rallies this year, it should be no surprise that Amazon Inc NASDAQ: AMZN too has been performing well. Shares of the e-commerce and cloud computing giant are up more than 60% since the first week of January and are well on their way to canceling last year's slide. 

It is, in fact, one of Amazon's best starts to a year in the past decade. And typically, investors want to be buying into a rally like this where there's been clear momentum for weeks and months. However, as we've seen and written about with Google and Tesla Inc NASDAQ: TSLA, eyebrows are being raised about the longevity of Amazon's current run. Let's jump into some of the reasons for and against chasing it. 

Frothy Valuation

Taking the bearish view first, there's the question of Amazon's valuation. As considered through the lens of their price-to-earnings (PE) ratio, currently 310, they're more expensive now than at any point since 2015. For context, Apple has a PE ratio of 32, while Meta's is 36. 

The primary reason for Amazon's PE ratio jumping from so high in tandem with its share price is due to its falling earnings versus Apple and Meta, which have seen their EPS rise along with shares. A high PE ratio might be acceptable when money is cheap, as investors can see a path for a company to scale and grow earnings to bring down its PE ratio.

But when rates have been rising and costs with them, investors have to be skeptical of any stock with an inflated PE ratio as it's really asking them to take a leap of faith. Looking back at some of the more recent earnings reports, it's clear Amazon is on its lowest run of EPS prints since before the pandemic; hardly the kind of fundamental statistic you want to hear if you're thinking about getting involved.

Expanding on the point of valuation and fundamentals, investors must also note Amazon has been issuing downward revisions for almost two years. To be fair to the management, it's not like they're not being upfront about the changing macro environment and challenging headwinds, but again it's a run of updates that's at odds with the stock's performance. In addition, where there has been growth, it's been uneven.

The company's AWS cloud computing unit has been profitable in its own right, but the e-commerce unit upon which Amazon built its reputation has struggled. It's become a regularly cited fact that the AWS unit alone has stopped earnings results from slowing down even more. 

Risk-on Sentiment

This brings us to the main questions, what's been fueling this rally, and is it worth buying into? You have to be thinking that much of this year's gains are correlated with those from Apple and the wider equity market. The benchmark S&P 500 index, for example, is up nearly 20% since January, indicative of a growing risk-on sentiment that has filtered out to help individual beaten-down stocks. 

And having had to watch their shares drop by nearly 60% last year, Amazon is firmly in that camp. In addition to the rebound bounce angle, there's also the fact that the Fed's cycle of raising rates is finally starting to have an effect on inflation. Higher inflation prints are the enemy of e-commerce companies as they often foreshadow reduced consumer spending, so any signs of inflation starting to cool is good news for Amazon's e-commerce revenue. 

But all things considered, we see the positive upside from both of these tailwinds as having been already reflected in the share price, with little room for further upside without further updates. To that end, Amazon's MACD signal has just flashed a bearish crossover, suggesting that momentum has started to swing toward the bears, so don't be surprised if there's some profit-taking at these levels. We like Amazon over the long term, but it's a stretch to recommend the rally being chased at this point.