About a month-and-a-half ago, I labeled Amazon.com, Inc. (NASDAQ:AMZN) as a “GOAT stock,” or the greatest of all time. I based that description on a combination of factors, which primarily includes the absolute dominance of Amazon.com in the e-commerce sphere. Additionally, CEO Jeff Bezos is hardly a complacent business leader, hungrily pushing his company towards innovation. Oh yeah, AMZN stock ain’t too shabby, either.
When all is said and done, it’s the willingness of people to part ways with their cash that truly matters. I think we’re all familiar with the basic criticisms of Amazon stock.
The company is, using the words of InvestorPlace feature writer James Brumley, “barely profitable.” Certainly, profitability margins are ho-hum at best. Also, whether we look at the price-earnings or forward-earnings ratio, AMZN is significantly overvalued.
And yet, Amazon stock continues to defy both investor expectations and the physical laws of the markets. Year-to-date, Amazon stock is up an amazing 33%. Its competitors, and those who are deeply affected by Amazon.com, are largely swimming in a tub of red ink. Even Wal-Mart Stores Inc (NYSE:WMT), which has AMZN locked in its sights, can only muster 13%.
But given the enormous rally in AMZN stock, should an overheated market concern investors? Not that I’m a barometer of anything, but shares are up nearly 11% from my “GOAT stock” article. Just from Murphy’s Law, I should be eating a face full of crow, especially in light of the not-so-great financials.
But seriously, can Amazon stock pull off another run from here?
Is AMZN Stock Too Hot?
Mr. Brumley is raising the caution flag. He writes, “Owning Amazon stock isn’t an investment in an e-commerce giant. It’s a bet on a premise. That premise is a presumption that other traders will be even more enamored by the barely profitable company six months to two years in the future.”
Whether you agree with him or not, I think we can all appreciate him crystallizing why it is that AMZN isn’t so compelling now. “Simply put, numbers ending with “000” tend to be viewed as subconscious targets, prodding the very buying (or selling) necessary to reach those levels. Now traders have nothing to psychologically latch onto with Amazon, leading to lost interest.”
The technical charts confirm Brumley’s warnings. As he mentions, Amazon stock is right at the top of a trend channel that’s been in play since 2015. Just judging from prior market dynamics, we would expect AMZN shares to at least drop back to the support line. If so, that could drop everybody’s favorite e-commerce retailer into high-$800 territory.
To throw in my two cents, shares of Amazon.com could be forming a rising wedge formation. According to StockCharts, the rising wedge “is a bearish pattern that begins wide at the bottom and contracts as prices move higher and the trading range narrows. In contrast to symmetrical triangles, which have no definitive slope and no bullish or bearish bias, rising wedges definitely slope up and have a bearish bias.”
Click to Enlarge
The caveat to this technical assumption, though, is that something drastic would have to spook the markets. I can’t help but notice in the StockCharts write-up about rising wedges, they use two companies that are no longer publicly traded. Furthermore, they charted these companies at a particularly volatile time for Wall Street.
No Drastic Moves Are Necessary for Amazon Stock
Other than losing psychological interest after touching $1,000, I’m not sure if I see the catalyst for a reversal. Amazon.com does not look like an undervalued opportunity, no matter how you cut it. But to be fair, we’ve been hearing the same criticism year-after-year.
I think it’s very prudent to expect a nearer-term correction. Admittedly, I’m surprised that AMZN has taken off the way it has this year. But I think those that got in late to the game don’t have to worry too much. As I mentioned in my last Amazon article, I firmly believe that the U.S. is the place to be, given our demographics and our per-capita income. Thus, I’d rather be long Amazon.com than Alibaba Group Holding Ltd (NYSE:BABA).
I’ve made this argument before with other companies, but it’s worth repeating. How happy you are with AMZN stock will entirely depend upon your goals. If you’re looking for an upside trade, I’m with Brumley — I think you’re a little late to the game. But as a viable investment, I don’t want to fault Amazon for hitting a milestone. To me, that just shows how much loved it truly is!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
