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Bear of the Day: Amazon.com, Inc. (AMZN)

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Amazon (AMZN - Free Report) , a Zacks Rank #5 (Strong Sell) stock, is engaged in the retail sale of consumer products and subscriptions globally. The company sells merchandise and content purchased for resale from third-party sellers through online and physical stores. AMZN also manufactures and sells devices including Kindle, Fire tablets, Rings, Echo, and other electronics.

Amazon also offers Amazon Prime, a membership program that provides free shipping of various items and access to streaming of movies and other content. In addition, AMZN operates Amazon Web Services (AWS), a subsidiary that provides on-demand cloud computing platforms to individuals, companies, and governments. Amazon was incorporated in 1994 and is based in Seattle, WA.

The Zacks Rundown

AMZN is part of the Zacks Internet – Commerce industry group, which currently ranks in the bottom 25% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months. Also note the unfavorable valuation for this group below:

Zacks Investment Research
Image Source: Zacks Investment Research

Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies. AMZN stock keeps having trouble as it continues to make a series of lower lows.

Recent Earnings Miss

Amazon has missed earnings estimates in two of the past three quarters. The online retailer most recently reported Q1 EPS last week of $4.24, missing the $8.73 consensus estimate by -51.43%. Revenues for the quarter slightly missed estimates, coming in at $116.44 billion.

Consistently falling short of earnings estimates (especially by a large magnitude) is a recipe for underperformance, and AMZN is no exception. The stock will have a tough time getting back to its outperforming ways if AMZN fails to impress in the quarters ahead.

Deteriorating Outlook

Analysts have decreased EPS estimates for AMZN across the board. The Q2 estimate has declined -60.71% in the past 60 days to $4.64, which would represent a -69.31% earnings regression versus the same quarter last year.

For the full year, analysts have slashed 2022 EPS estimates by -77.6% to $10.85, translating to negative growth of -83.26% versus last year. Falling earnings estimates are always a concern, but a decline of this scale is a big red flag. If the company continues its recent streak of earnings misses, more pain will likely be ahead for the stock. Negative growth year-over-year is the type of trend that bears like to see.

Technical Trend and Valuation

As illustrated below, AMZN is in a sustained downtrend. Notice how the stock has plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. The stock is making a series of 52-week lows. Also note how both moving averages have rolled over and are sloping down – another good sign for the bears.

StockCharts
Image Source: StockCharts

Even with the recent declines, AMZN is still relatively overvalued, irrespective of the metric used:

Zacks Investment Research
Image Source: Zacks Investment Research

Final Thoughts

Recent earnings misses and an unpredictable equity market don’t exactly favor bullish AMZN investors. Our Zacks Style Scores depict a weakening outlook for this stock, as AMZN is rated a ‘C’ in our Growth category and a ‘D’ for our overall VGM category. A deteriorating fundamental and technical backdrop show that this stock is fighting an uphill battle.

Falling future earnings estimates are a big red flag and need to be respected. These will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend. The fact that AMZN is part of one of the worst-performing industry groups simply adds another headwind to a long list of concerns. Bulls will want to steer clear of an overvalued AMZN until the situation shows signs of a turnaround.


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