Shares in Amazon.com, Inc. (NASDAQ:AMZN) failed to find support at a key technical level for the first time in a long time last week, but that’s actually good news for AMZN stock bulls.
Amazon stock has been selling off ever since it made an all-time high in early October. It has lost nearly 9% ever since. True, broader market has cooled off too but the S&P 500 is down a more modest 3% over the same span.
More troubling for the short-sighted is that this new downtrend in AMZN stock might just be getting started. Amazon stock failed to find support at its 50-day moving average last week, which is something that hasn’t happened since 2015. That’s a clear technical warning sign of more losses to come.
But so what? This drawdown is only making AMZN stock cheaper for patient investors.
The immediate cause for this sudden shunning of Amazon stock was a “disappointing” quarterly report. Earnings came to just 52 cents a share vs. analysts’ average estimate of 78 cents. That’s a big earnings miss. Revenue was essentially in line with the Wall Street forecast, according to a survey by Thomson Reuters.
Nevermind that revenue grew nearly 30% year-over-year — off a base of $25 billion. Operating profit advanced more than 40%. Free cash flow rose to $1.7 billion from $738 million a year ago. And earnings per share tripled, which is pretty good for a company not known for generating reliable profits.
Importantly Amazon Web Services continued to drive the upside. The company’s Cloud-based services operation delivered almost all of Amazon’s operating profit and yet still accounts for just 10% of total revenue. It looks like this business is just getting started.
Click to Enlarge This is important because AWS is a centerpiece of the buy thesis on AMZN stock. Operating profits from the Cloud now dwarf the income churned out by the company’s e-commerce segments. And the free cash flow it helps fuel Amazon’s always ambitious expansion plans.
As for the all-important outlook for the holiday season quarter, Amazon issued a forecast that was largely in line with analysts’ expectations. There was no warning on guidance here.
AMZN Stock on Sale
Part of the reaction in shares has to do with Amazon’s legendary cost situation and the impression that it doesn’t care about generating income.
So what? That’s not exactly something new to be factored into the AMZN share price. Chief Financial Officer Brian Olsavsky made it clear to analysts on a conference call:
“We have said investments are going to be lumpy. They will be high sometimes and moderate at other times. Right now the second half of the year looks like a big step up.”
Investing for growth is what Amazon does. That’s how it can trade at 84 times earnings. A bet on Amazon isn’t a wager on short-term profits. It’s about what the company can create years, perhaps decades, from now.
That’s why the selloff should just be ignored. Hitting an all-time high put a target on its back. Overheated stocks need to cool down sometimes. The point is that the longer trend in this name is only to the right and up.
For what it’s worth, analysts’ average price target on AMZN stock stands at about $922 a share. That gives it implied upside of over 18% in the next 12 months or so. That’s a buy in any investor’s book. Indeed, of the 47 analysts covering Amazon stock, 42 of them rate it at buy. Four say it’s a hold, while one lonely analyst calls it a sell.
That’s why any drawdown in Amazon stock is welcome. It affords investors the opportunity to buy shares at a discounted price.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
