A slowing economy could significantly impact discretionary spending, weakening Amazon’s e-commerce revenue, which still constitutes a major portion of its business. The company’s substantial reliance on digital advertising revenue (which grew 20% YoY) may be another vulnerability. In a downturn, advertising budgets are typically among the first expenses companies cut, potentially stalling this crucial growth engine.
Furthermore, Amazon’s valuation metrics paint a mixed picture. While the forward P/E ratio of 40 may seem modest relative to its historical levels, this assumes continued robust growth in AWS and advertising segments. If AWS growth merely meets the low end of estimates (around 15%), Amazon’s projected cash flow growth may be overly optimistic, raising questions about its relatively high cash flow multiple compared to other tech giants. Investors may want to keep a close eye on operating cash flow trends in the upcoming earnings release, as any unexpected deceleration could challenge the thesis of Amazon being a “surprisingly undervalued” stock.
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