AutoZone (NYSE:AZO) stock has steadily trended upward over the last two years. The company has benefited from Americans keeping their cars longer and buybacks have helped propel the stock to highs near $1,275 per share in early December.

However, even as the S&P 500 has risen to record highs, AutoZone stock has begun to drop. Moreover, both O'Reilly Automotive (NASDAQ:ORLY) and Advance Auto Parts (NYSE:AAP) trade at higher multiples. Although Genuine Parts Company (NYSE:GPC) trades at a similar valuation, its shareholders receive a dividend that yields 3% at current prices.

The rising stock price and lower valuation may attract investors. However, conditions within both the market and the company itself indicate that AutoZone stock could experience a dramatic reversal.

The growth of AutoZone stock

At first glance, one might wonder why AutoZone stock appears unattractive today. After all, it increased by 680% during the 2010s. Its archrival O'Reilly Automotive registered a return of 1,050% over the same period. Nonetheless, AutoZone became one of the best-performing retail stocks of the decade

Two lanes of cars stuck in a traffic jam.

IMAGE SOURCE: GETTY IMAGES

Moreover, Americans tend to keep their cars longer than in the past. The average age of a running vehicle in the U.S. has reached a record of 11.8 years. That means Americans are choosing to repair older cars more often, likely using parts from a store like AutoZone, rather than buying new. 

Furthermore, it operates in a recession-resistant business. People need a running vehicle in good times and in bad, and they will spend money to keep them running. A recession could also help AutoZone somewhat as fewer people can afford to replace their cars during harder times.

Why the growth may not continue

However, while a recession may not derail AutoZone stock, some auto industry trends could work against the auto parts retailer. For one, consumers have increasingly turned to electric vehicles. That causes problems for AutoZone and its peers. EVs have markedly fewer moving parts compared to gas-powered vehicles.  That will mean that vehicles need less periodic maintenance. For AutoZone, that means lower demand for oil filters, fuel pumps, alternators, and the like.

Another trend working against AutoZone is demographics. Those between the ages of 18 and 34 spend more on auto repair and maintenance versus the average American. That bodes well for AutoZone... if this cohort chooses to own cars.

Unfortunately for the auto parts retailer, this generation more often chooses ridesharing or public transportation over car ownership. With fewer of them owning cars, many will not have a reason to set foot in an AutoZone store.

Further, in past years, auto parts sales enjoyed a degree of protection from e-commerce. When cars break down, owners want them running as soon as possible. This discourages long wait times for e-commerce deliveries, and often, price shopping.

However, Amazon (NASDAQ:AMZN) stoked fear when it quietly entered the industry a few years ago. With the online giant now offering one-day delivery with its Prime service, customers can now buy auto parts from Amazon without a long wait. This could cut AutoZone's profits as it adjusts its pricing and e-commerce strategy to compete.

AutoZone and its financials

Worse, lower profits could expose significant vulnerabilities in AutoZone stock. At first glance, its P/E ratio of just above 17.5 seems reasonable, particularly since analysts forecast average annual earnings increase of 10.95% per year over the next five years.

However, the balance sheet appears more troubling. The stockholders' equity,  the value of the company after paying off debts and expenses,  stands at around -$1.776 billion as of the last quarter.   This has remained negative for years as management has prioritized stock buybacks over balance sheet stability over the last several years. During the previous reported quarter, the company repurchased $450 million worth of AutoZone stock and had $1.277 billion remaining under the latest share buyback authorization.

Should industry and demographic trends wipe out profits, it may have to reissue some of these repurchased shares simply to cover expenses.   Such an occurrence could hurt AutoZone stock, which trades at just over $1,120 per share as of the time of this writing. This may explain why this stock trades at a discount to most of its peers. Despite a reasonable P/E ratio and steady profit increases, AutoZone stock is not as stable as it might appear.

Avoid AutoZone stock

Although AutoZone stock ran smoothly in the 2010s, the competitive landscape and the financial condition of the company indicate points of weakness. Admittedly, if Americans need fewer auto parts in the next few years, this will hurt both AutoZone and its peers. 

Competition could also hurt AutoZone stock in another way. Due to aggressive stock buybacks, stockholders' equity has long remained negative. Should the company need to raise cash, its financial condition could lead to massive share issuance, significantly harming AutoZone stock.

AutoZone enjoyed tremendous success in the 2010s. However, with market conditions changing for the worse, investors need to take profits.