One stock that has been awfully quiet recently is Amazon.com, Inc. (NASDAQ:AMZN). It has actually been more than quiet. AMZN stock has been bad. Over the past 3 months, Amazon stock is down almost 7% versus more than a 2% gain for the S&P 500.
Does this recent weakness mean anything?
Market technicians think so. Let it be clear: I’m not a big chart guy. I often think it is akin to reading tea leaves.
But it’s nonetheless interesting to note that one of the things trending on popular social finance platform StockTwits is a bearish technical indicator forming in the AMZN stock chart.
It’s called the head and shoulders pattern, and it supposedly predicts a bullish-to-bearish trend reversal. The pattern essentially indicates that a stock has failed to continue its bullish uptrend. It looks like it could be forming in AMZN stock (see here and here).
Interesting. But again, it is just tea-leaf reading.
Do the fundamentals support a big decline in AMZN stock here?
I don’t think so.
Amazon’s Fundamentals Are Strong
For those who haven’t been following closely, here’s a rundown of what has been happening at Amazon (spoiler: it’s all pretty good).
The big news is that price cuts at Whole Foods Market, Inc. (NASDAQ:WFM) are doing what they are supposed to be doing: driving huge traffic share gains. In the two days following nation-wide price cuts, Whole Foods saw foot traffic jump 25%, according to Foursquare.
It remains dubious to some how Amazon is taking a company with 5% operating margins and substantially cutting prices, but there is no doubt that the lower prices are resulting in huge revenue gains. Eventually, with automated technologies coming to the fore, Amazon will be able to significantly lower Whole Food’s 28% operating expense rate (fire people, put in machines).
In the long-run, then, Amazon will likely be able actually grow Whole Food’s operating margins to above 5% and do so on a much larger revenue base.
That is a huge win for Amazon.
Now, consider all the things Amazon can do with a bunch of brick-and-mortar locations. Online grocery shopping becomes that much more realistic because delivery is significantly more convenient. Amazon can start showcasing its own suite of consumer electronic products in Whole Foods stores across the nation. The company is also significantly closer to breaking into the $400 billion pharmacy market.
More big wins for Amazon. Its starting to look like the market is severely under-estimating Amazon’s ability to turn the Whole Foods acquisition into a grand slam.
Make no mistake. Amazon will do just that.
Beyond Whole Foods, Amazon’s business remains on fire. The cloud business continues to lead the pack. Amazon Web Services is expanding to the Middle East by 2019. Fellow cloud giants Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG) have yet announce expansion intentions in the Middle East.
Meanwhile, Amazon’s entertainment business is getting a face-lift. Amazon realizes that they are losing badly in their original content war with Netflix, Inc. (NASDAQ:NFLX). Consequently, Amazon is starting to re-think its original content strategy. The company is starting to tactically leverage its wealth of consumer purchasing data to create shows with global appeal.
On the music side of things, Amazon is using its super-popular voice assistant, Alexa, to spark growth in Amazon Music. Amazon Music has long been stuck in third place in the music world behind Spotify and Apple Music. By integrating Alexa with the mobile Amazon Music app, Amazon hopes to enhance the value prop of Amazon Music.
The movie and music enhancements may not seem like needle movers, but a more robust entertainment offering from Amazon will almost undoubtedly lead to more Amazon Prime subs. As we all know, the Amazon growth story is almost all about Amazon Prime sub growth.
From Whole Foods to AWS to Amazon Prime, the whole Amazon growth story is still as strong as ever.
Bottom Line on AMZN Stock
The tea leaves are bearish.
But the fundamentals are bullish.
Amazon remains a “buy the dip” stock. So I’m buying this dip.
As of this writing, Luke Lango was long AMZN.