Stock Market

Over the past few years, Amazon’s (NASDAQ:AMZN) performance has been a roller-coaster ride. AMZN stock plummeted by 50% from January to December 2022 as market concerns grew about the impact of inflation and potential interest rate hikes by the Federal Reserve. However, in 2023, the stock has been on fire, substantially undoing a big chunk of the decline. I worry that AMZN stock now is vulnerable to rolling over.

Source: Charts by TradingView

Amazon Faces Key Challenges

One of the main challenges Amazon faces is the need to control costs in the fulfillment segment. Despite the company’s emphasis on cost structure and efficiency, Q1 results did not show the urgency investors were hoping for. While net product sales for the quarter were up by 0.9%, the cost of fulfillment went up by 3.1%. This trend suggests that Amazon’s profitability from its e-commerce business might be under threat.

Another concern is the growing trend of stock-based compensation at Amazon. In the past three years, Amazon’s stock-based compensation has grown by 113%, from $9.2 billion in 2020 to $19.6 billion in 2022. This trend is worrying, especially when operating income and cash flow are falling at the same time. In addition, AWS may now be problematic. AWS has been one of the key catalysts for bulls, and it’s now experiencing some softness in recent quarters. AWS’s market share and margins are falling, and while the company is optimistic about AWS’s long-term potential, the short-term performance remains a concern.

Amazon’s competitive landscape is also changing. Numerous retailers are now offering direct-to-consumer services, posing a threat to Amazon’s e-commerce dominance. Additionally, rising competition in the cloud business is another challenge that Amazon must contend with. There is certainly a lot of customer loyalty, but that doesn’t stop competition from encouraging sales from their own respective websites. If we look at AMZN relative to the S&P SPDR Retail ETF (NYSEARCA:XRT), the ratio looks like it wants to turn around now.

Source: Charts by TradingView

Amazon also faces potential legal and regulatory challenges. The company is currently under scrutiny by the Federal Trade Commission over its Prime membership cancellation process. Such legal battles can have a significant impact on the company’s financials and reputation.

The Bottom Line on AMZN Stock

Given the risk of a market correction and extended momentum, it’s clear that the company is at a critical juncture. While Amazon’s size, scale, and diversified revenue streams give it a competitive edge, the company needs to address its financial performance, increasing competition, and regulatory challenges to ensure its future growth and profitability.

None of this may matter if FOMO continues, but given that Amazon is a large portion of many of the large-cap averages that people trade through mutual funds and ETFs, a bet against the market is inherently a bet against Amazon.

On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Michael A. Gayed is the Publisher of The Lead-Lag Report, and Portfolio Manager at Tidal Financial Group, an investment management company specializing in ETF-focused research, investment strategies and services designed for financial advisors, RIAs, family offices and investment managers.

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