Amazon.com, Inc. (AMZN) Stock May Trip Up, But Don’t Short It

Amazon.com, Inc. (NASDAQ:AMZN) is a rare example of a blue-chip company with the growth potential of a startup. While I’m not sure if it will ever return to its triple-digit heyday, a 33.5% year-to-date performance isn’t shabby. Furthermore, Amazon stock has breached the psychological $1,000 level more than once, possibly suggesting another leg up.

Unfortunately, not everything is smooth and clear-cut in the markets, and AMZN is no exception.

Amazon Stock May Trip Up, But Don't Short It
Source: Amazon

Over the trailing three months, equity growth has been flat to slightly declining. Against the all-time closing peak of Amazon stock, shares are down nearly 5%. Although that by itself isn’t necessarily cause for alarm, the overall trend is still negative.

Keep in mind that when AMZN stock first hit $1,000 in June of this year, shares closed slightly above $1,010 before slipping into consolidation. The next spike rally pushed the price to just under $1,053. Currently, shares are trading at a buck above $1,000.

If you’re a technically minded investor, you’ll recognize this pattern as a possible head and shoulders formation, which indicates a trend reversal pattern. As InvestorPlace contributor Luke Lango reported late last month, either technical analysts are crazy, or the crazy are all seeing the same thing!

We can have the fundamental versus technical methodology debate, which will then likely lead to heated discourse. Instead, I’ll take the middle ground and offer a compromise. Fundamentally, Amazon stock is sound. However, if investors no longer see it that way, it’s not the wisest course to ignore potential risks.

We can argue about a company backwards and forwards. At the end of the day, the markets are always right. So now, what to do with the question, “Amazon stock, buy or sell?”

Astounding Fundamentals Back Amazon Stock

Lango argues that pessimistic “tea-leaf” readers are missing the bigger picture. Fundamentally, AMZN stock is a blue-chip giant that keeps widening its footprint. By going bearish for too long, you risk getting stomped.

First, my colleague mentions the recently acquired Whole Foods Market, Inc. cutting prices, leading to expected results: driving huge amounts of traffic, and in turn, higher revenues. More importantly, AMZN has technological leverage to increase margins in a notoriously margin-poor industry. In Lango’s words, Whole Foods, via AMZN, can “fire people, put in machines.” It’s cold, but it’s effective.

I’d also argue that eschewing earnings for top-line sales is part and parcel Amazon’s evil plan for world domination. Earlier this June, I warned that the e-commerce firm was going to “slaughter” the grocery industry. It’s tough to get into this business, which protects current players. But once a whale comes in, it could be lights out.

Unfortunately, that’s exactly what we’re seeing. Kroger Co (NYSE:KR) is down 39% YTD. Sprouts Farmers Market Inc (NASDAQ:SFM) shed nearly 24% since the beginning of this June. Smart & Final Stores Inc (NYSE:SFS) is at great risk of losing half of its equity this year. In comparison, Amazon stock is in the stratosphere.

Second, AMZN is truly in a class of its own. InvestorPlace’s Vince Martin calls it “one of the most transformative companies in American history.” He further writes:

“The breadth and depth of Amazon’s business is astounding. So is the number, and quality, of companies that Amazon has bested in major end markets. There’s a reason that the mere rumor of Amazon’s entry into a new space leads stocks in that sector to swoon. No one wants to compete with Amazon because so few have succeeded yet.”

Amazon Stock Faces Near-Term Challenges, But Long-Term Rewards

We still haven’t talked about Amazon Web Services, so dominant is the company. Any one of the firm’s bullish arguments can spark a rally in Amazon stock. Thus, it’s hard to argue against the bulls — the fundamentals are just too darn good.

However, I don’t want to get too caught up in the fervor that I forget to understand why AMZN stock slipped. Even if you don’t believe in technical analysis, the bearish head and shoulders formation has nothing to do with voodoo magic. In this case, the pattern merely reflects the fact that investors don’t want to buy things at a premium.

Over the long term, I agree wholeheartedly with my colleagues — Amazon stock is built for a marathon. But in the day-to-day sprints, I think you have to be careful. Psychologically, people have trouble convincing themselves to buy one share of a company at $1,000, as opposed to many shares priced at $10 or less.

But once the markets accept AMZN stock at its new price point, we legitimately could see a substantive rally develop. Amazon is what Broadway would call a “triple threat.” It’s dominating its core industry, intruding into others, and forging brand new ones. Short it at your own risk.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

 


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