What happened
Shares of Amazon (AMZN +0.15%) fell on Tuesday after interest rates rose and an analyst warned that rising labor costs could pressure the e-commerce giant's profits.
As of 2:45 p.m. EDT today, Amazon's stock was down 2.5%.
So what
Growth stocks like Amazon are valued based upon their expected future earnings and cash flows. When interest rates increase, investors typically discount their profit projections at a higher rate to account for the larger yields they can earn on bonds and other fixed-income investments. This often leads investors to place a lower present value on growth stocks.
With the yield of 10-year Treasury notes surging above 1.5% in recent days, the prices of many growth stocks have fallen in kind.
Image source: Getty Images.
Investors are also growing increasingly concerned that Amazon's hiring spree will weigh on its profitability in the coming quarters. On Sept. 14, the company announced it plans to hire 125,000 people to work in its fulfillment centers and transportation operations. The jobs will feature average starting pay of over $18 per hour, comprehensive benefits, and sign-on bonuses of up to $3,000 in some locations.
On Tuesday, Morgan Stanley analyst Brian Nowak cut his price forecast on Amazon's shares from $4,300 to $4,100. Nowak warned that the company's ballooning employee compensation expenses could dent its operating income by as much as 16% this year and 19% in 2022. Thus, he expects the stock price to remain stagnant until its e-commerce growth begins to reaccelerate next year after lapping difficult coronavirus-related comparisons in the third and fourth quarters.
Now what
While it's certainly possible that Amazon could deliver lackluster performance in the quarters ahead, investors will likely be best served by adopting a longer-term perspective. Notably, Nowak's reduced price target still represents potential gains to shareholders of roughly 24% from the stock's current price near $3,300.
More importantly, he correctly notes that Amazon's moves to expand its workforce could allow it to bolster its logistics network, decrease shipping times, and gain share in the massive e-commerce market. So although these growth investments could dent Amazon's near-term profitability, they are likely to make it a far more valuable company over time.
