Shares in Amazon.com, Inc. (NASDAQ:AMZN) slipped again Monday, but a new hike to its target price helps confirm that it’s a buy on the current dip. Credit Suisse lifted it price target on AMZN stock to $1,050 from $920 a share as it reaffirmed its rating of “Outperform” (buy, essentially.) The new target gives the Amazon stock price implied upside of 14% in the next 12 months or so.
The point is that AMZN is going to have its ups and downs. No stock moves in a straight line. And when a stock moves as Amazon has, it’s almost inevitable that it will stumble at some point.
As Barron’s noted Monday, short interest in AMZN has been climbing this year. But the bets against the Amazon stock price don’t reflect pessimism over the e-commerce company’s growth prospects. Rather, it’s more likely due to the old cliche of the higher they fly, the farther they fall.
It’s perfectly natural to see AMZN stock consolidate or even sell off a bit. An extremely pricey stock riding a wave of outsized gains is practically spring-loaded for a drop. Consider that Amazon stock set a record high in early October after gaining more than 20% for the year-to-date.
Time to Buy More Amazon Stock
AMZN bulls should welcome the hiccup if only because it would temporarily make shares a better buy. At current levels, Amazon stock goes for 77 times forward earnings. That’s rich, but not unreasonable — given a compound annual growth rate forecast of 50% a year for the next five years. For next year alone, analysts project AMZN’s growth rate at 80%.
Mind you, this is a company with a market capitalization of $385 billion. Not since the glory days of Apple Inc. (NASDAQ:AAPL) have we seen a mega-cap stock defy the law of large numbers to such a degree. And Amazon, remember, isn’t a one-trick pony like AAPL is with the iPhone.
It’s also worth noting that AMZN stock isn’t expensive by its own standards. Shares have traded an average of 100 times forward earnings over the last half decade. On a relative basis, Amazon stock is actually on sale.
Even if the current drawdown has more room to run, it’s a good bet that it won’t last very long. Stocks like AMZN are in fashion during the holiday selling season. It’s also possible that some portfolio managers will chase performance to add a little “window dressing” to their annual returns.
The bottom line is that Amazon has a tremendous growth rate by any standard and a jaw-dropping one for a company of this size. Technicals and profit taking are fueling the current decline, not fundamentals or headlines. After all, nothing has really changed. If there’s a benefit, it’s that the valuation has cooled off some.
The buy case remains in force for Amazon stock. Sometimes even hot growth stocks require investors to be patient.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
