I don’t like making upside calls for high-priced stocks. To be quite honest, I don’t have any other reason for my apprehension other than the price tag. It’s psychologically jarring, no matter how great the underlying company is. That’s why many people don’t even bother with companies like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL), no matter how much they believe in them.
InvestorPlace feature writer James Brumley made the argument that the financial markets are driven by the whims of human emotions. Unlike computer algorithms, we feel things — joy, fear, the disapproving look of a spouse. All of these elements are heightened, Mr. Brumley implies, when an investment hits key benchmarks. AMZN stock reaching the $1,000 level certainly qualifies.
“The psychology of big, round numbers is nothing to dismiss. Although the concept is usually reserved for market indices, it still applies to stock … when they actually have big, round numbers to dissect. 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.”
I absolutely respect the dynamics to which Brumley refers. And the continued enthusiasm for Amazon stock brings to light the flip side of the psychology argument.
The Bullish Psychology of Quadruple Digits
An old saying declares that “the first million is the hardest.” The adage is self-explanatory. When you start a venture, like AMZN did many years ago, you are essentially building something out of nothing. You have no credibility, no marketing buzz, no tailwind from which to benefit. That first million is indeed grueling. But once that benchmark is reached, you have acquired the momentum to keep moving higher.
You can make the same argument about Amazon stock.
Consider that AMZN started publicly traded life with an initial public offering of $16. To be where it is now, shares had to soar nearly 6,200% in the markets. By default, an investor endured decades of patience and iron will.
After breaching four digits, the next psychological target for AMZN stock is, what? $1,500? Heck, let’s call it $2,000. That’s only a 100% move, or a doubling from its current position. Nominally, it’s impressive, but the “work” required to move the needle there is less than 2% the work it needed to move shares from its IPO to $1,000.
Obviously, a doubler is a bit more difficult than that when you consider the sheer scale of Amazon itself and its $136 billion in 2016 profits — the business will have to grow somewhat to justify another doubling, and it’s no small feat to double nine digits’ worth of sales.
Still, how many companies have moved on following their breach of the $100 mark? Price might be a consideration, but if it were the only one, everyone would buy penny stocks.
AMZN Stock Still Is a Great Buy
Another factor to consider is the “normalization” of Amazon. This isn’t some no-name stock like Seaboard Corp (NYSEMKT:SEB), which trades at more than $4,000 per share but also never sees the light of headline day.
Amazon is one of the most popular and well-covered companies on the planet.
I don’t doubt that a few investors will jump ship now that Amazon hit these lofty heights, but how many people really think Amazon’s ascent to these heights is just an aberration?
Fundamentally, e-commerce is the future. Wal-Mart Stores Inc (NYSE:WMT) and Best Buy Co Inc (NYSE:BBY) are two success stories of retailers who integrated online channels with their brick-and-mortar operations.
But Amazon still does it much, much better.
Despite how magnanimous the e-commerce giant is, it still has tremendous growth opportunities. Amazon doesn’t accept payments made through Paypal Holdings Inc‘s (NASDAQ:PYPL) system. Customers aren’t pleased with the status quo, but it could also open opportunities if corrected.
The coup d’etat is if the company would accept Bitcoin or other digital currencies. Considering the massive support for bitcoin, that’d be a win-win across the board.
None of that speaks for its other businesses, such as the high-margin Amazon Web Services cloud division, or its foray into highly automated grocery stores.
Ultimately, the $1,000 mark is a short-term psychological hurdle, but nothing about it changes the fundamental picture, which means its ability to cap AMZN stock is limited.
If Amazon was a clear-cut bull play yesterday, that’s not changed by a four-digit price today.
As of this writing, Josh Enomoto was long Bitcoin.