3 Reasons to Stay on the Sidelines With Amazon Stock Now

E-commerce, logistics and cloud-computing behemoth Amazon (NASDAQ:AMZN) has been a favorite pick thus far for many investors this year. Amazon stock has giant rallied 28% on a year-to-date basis, and this is after a meteoric 81% rise in 2023.

Cloud computing through its Amazon Web Services business and the expansion of its existing advertising business are just some of the reasons investors have been excited. However, there are also several reasons to be cautious on a going-forward basis with Amazon’s stock. Below are 3 reasons I consider Amazon Stock to be a “hold.”

Macro Headwinds and Amazon Stock

Macroeconomic uncertainty has hit a variety of technology businesses. E-commerce, which relies heavily upon the buying strength of consumers, has certainly struggled to re-accelerate growth.

For the fourth quarter of fiscal year 2023, while Amazon beat Wall Street estimates, the “online stores” segment generated more than $70 billion in revenue, representing growth in the upper-single digits year-over-year. First quarter sales for the “online stores” segment similarly registered growth in the single digits.

To combat slowing growth, Amazon has initiated a number of cost-cutting measures, including a large number of layoffs.

Positive shifts in operating profit in fiscal year 2023 and Q1 of fiscal year 2024 underscored the extent to which the e-commerce giant has been able to effectively trim operating expenses. Because the e-commerce business is experiencing headwinds, Amazon has had to rely on its cloud business and advertising business for growth.

AWS Growth Lags Behind Microsoft’s Azure

Amazon Web Services, for some years now, has been a key driver of top-line growth. The rise of cloud computing follows a secular trend of enterprises across industries and geographies shifting essentially scaling back their capital expenditures for on-prem servers and outsourcing their workloads to cloud environments, like AWS.

Amazon Web Services doesn’t appear to be experiencing the AI growth that Microsoft‘s (NASDAQ:MSFT) Azure or even Alphabet‘s (NASDAQ:GOOG,NASDAQ:GOOGL) Google Cloud have reported in recent quarters.

In the first quarter, AWS grew 17% on a year-over-year basis. While this figure was above Wall Street estimates, this figure is still below Azure’s 31% year-over-year during the same period, 7 percentage points of which had to do with demand for AI workloads.

Amazon’s management team expressed growth in AWS would pick up in the near-term as customers increase demand for developing and hosting AI products. However, until that happens, AWS is trailing Azure.

Lastly, Alphabet’s (NASDAQ:GOOG,NASDAQ:GOOGL) cloud business, while small, is catching up to the likes of AWS and Azure, and will likely be a formidable competitor, particularly in the space of AI on a going-forward basis.

Valuation Among Tech Giants’ Highest

A final point to note regards valuation. According to Koyfin, Amazon’s trading multiple currently sits at 40.7x forward earnings. Of the trillion-dollar tech stocks, the only one to boast a valuation larger than that of Amazon’s is AI chipmaker Nvidia (NASDAQ:NVDA).

Microsoft, for its part, trades at 35.6x forward earnings, and Alphabet trades at an attractive 24.0x forward earnings.

Ultimately, Amazon stock is trading at premium that doesn’t seem to have justified itself. Some analysts might point to Amazon’s burgeoning advertising business, which raked in $11.8 billion in revenue during the first quarter, representing a 24% year-over-year surge.

Although Amazon’s advertising business is emerging as a major player in the space, thanks to products like Prime Video, Alphabet and Meta Platforms (NASDAQ:META) will continue to being formidable foes in that space for the time being.

Not to mention, both Alphabet and Meta announced quarterly dividends this year, while Amazon, despite all the profit it’s generating, has not.

These concerns lead to me think Amazon’s valuation looks a bit stretched in comparison to its peers.

On the date of publication, Tyrik Torres 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.

On the date of publication, the responsible editor did not have (either directly or indirectly) and positions in the securities mentioned in this article.