Covid-19 may have put afterburners on the growth of e-commerce in 2020 and 2021, but Amazon (NASDAQ:AMZN) stock may be running out of fuel lately. Thanks to the company’s pandemic windfall, AMZN shares more than doubled from their “coronavirus crash” lows in March 2020. But since September, prices have zig-zagged between around $3,000 and $3,500 per share.
Will this trend in Amazon stock continue through the rest of 2021? If markets get over recent concerns about inflation, it may be possible. Even with its growth slowing down post-Covid, AMZN stock has a shot of holding steady while it grows into its valuation.
But it’s hard to tell how Amazon shares will perform if markets remain fearful of inflation and its effects, including possible interest rate hikes. On the one hand, investors could see AMZN stock as a defensive play compared to more high-flying names that have soared to unsustainable valuations.
On the other hand, it’s not as if this stock sports a discount valuation itself. Trading at a premium to its FAANG peers (Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL)), it’s debatable whether AMZN stock is immune to a correction. So, what’s the takeaway here? It may be more stable than most “story stocks.” But, given its current forward multiple and the fact it’s not a true “defensive stock,” don’t look at AMZN stock as a possible safe harbor.
Why AMZN Stock Hasn’t Moved Much Since Last Fall
As I mentioned above, interest in Amazon stock has taken a breather over the past six months. After experiencing a tremendous boost thanks to its pandemic tailwinds, the stock has traded sideways since the fall. So, what drove this to happen?
This trend is driven by concerns that AMZN stock’s blockbuster growth in 2020 would slow down considerably in 2021. And based on sell-side projections, that’s going to be the case. Analysts project sales growth of 27% in 2021 and 18.6% in 2022. Certainly nothing to sneeze at, but these projections pale in comparison to the top-line growth numbers posted in 2020 (around 37%).
In short, investors were not wrong in growing reluctant to bid AMZN stock higher once it rose above the $3,000 per share price level. They may have been willing to bid up stocks growing at a faster clip. But AMZN stock and its decelerating growth? Not so much. This has been disappointing for those who bought Amazon stock six months back and have only seen gains of 1.7% since then.
Such tepid performance could continue. Given its still-premium valuation, a correction may even drag Amazon back down.
How Shares Will Fare if Growth Stocks Continue to Contract
Right now, we may be seeing the start of a full-on market correction in response to inflation worries — especially in growth stocks that saw their businesses prosper and their stock market valuations expand during the outbreak.
You may chalk up the strong performance of tech stocks to their respective pandemic tailwinds. But the Federal Reserve’s aggressive monetary policy played a big role in this as well. With interest rates near zero, it made perfect sense for investors to bid up all stocks, not just growth stocks, to valuations on par with the peak of the “Dotcom Bubble.”
The rising tide of lowered interest rates raised all boats, but tech-related growth stocks have seen the greatest benefit. Even after the sector experience an initial pullback in late February, many high-flyers continue to sport unsustainable valuations. For example, think of the triple-digit forward price-to-earnings (P/E) ratios of names like DocuSign (NASDAQ:DOCU), which, as of this writing, has a forward P/E ratio of 149.25x.
As for Amazon? It’s by no means a cheap stock. Amazon’s forward P/E ratio, 54.05x, is leaps and bounds above what other tech behemoths, like Apple and Microsoft (NASDAQ:MSFT) currently command. This leaves plenty of room for valuation contraction if markets continue to correct. With this in mind, I wouldn’t count on AMZN stock being immune to an overall tech sell-off.
Debatable Whether Amazon Will Continue to Hold Steady
As a company, Amazon may be unsinkable. It dominates the e-commerce space, with over half of U.S. online retail spending happening on its platform. Not to mention it’s a leading name in the cloud computing and content distribution spaces as well.
Amazon’s underlying business may remain strong, and will likely see double-digit growth in 2021 and 2022. But even though AMZN stock has held steady since September, it’s hard to tell whether that’ll continue if we see a correction. So be cautious about viewing Amazon as a safe harbor.
On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.