A quick Google search of articles related to Amazon.com, Inc. (NASDAQ:AMZN) stock in the past week reveals just how bullish Wall Street is on Amazon stock these days.
One offers “10 Reasons to Buy Amazon Stock — And Consider Never Selling.” Another claims it is “Almost Impossible to Find a Bear on Amazon Stock.” One more simply states a fact, that “Amazon Shares Break Out to New High as Optimism Stays Strong.” Few stocks elicit as much universal positivity as AMZN, and with good reason. It’s up more than 300% in the last three years, including a 60% run-up in the last year.
Furthermore, Amazon’s profits — which for years ranged from fleeting to non-existent — are accelerating. According to Yahoo! Finance, analysts expect the company’s earnings per share to nearly double this year. Meanwhile, between its new Whole Foods Market, Inc. (NASDAQ:WFM) acquisition, a big push into digital advertising, and possible entry into the pharmacy and logistics markets, Amazon is becoming more diversified by the day, with brand new revenue streams.
From that perspective, the future of Amazon stock looks as bright as its past. And if you’re investing for the long haul, AMZN is on the very short list of stocks I’d recommend you buy and hold for the next 10, 15 or 20 years.
However … things happen on Wall Street. And by things, I mean corrections: No stock rises in a straight line over time without interruption. While the law of averages is not a reason to preemptively sell AMZN stock for fear of an impending correction, there are other factors that could threaten to derail Amazon’s rally, or at least slow it down.
Here are three possible threats to Amazon stock:
Sky-High Valuation on Amazon Stock
AMZN has always had a high valuation. The stock has almost never had a price-to-earnings ratio under triple digits. But right now, its PE is particularly high. Amazon stock currently trades at 310 times trailing-12-month earnings, exactly twice its PE ratio of a year ago and the highest it’s been in nearly two years. It’s not a major red flag for a stock that has made a living defying high valuations. But if a market sell-off occurs, it could be enough of a reason for value hounds to trim some AMZN shares from their positions.
Sector Rotation and Amazon Stock
This was a common theme in the latter part of 2017. Investors moved in and out of sectors starting in late summer and early fall, and the market was more or less stagnant in August and September. Growth stocks struggled the most, and that included AMZN stock, which lost more than 100 points in two months. It has since more than recovered those losses. But with the market inching closer to a record-long correction-free streak, chances are the next pullback will be deeper and last longer. Blue-chip, market-leading growth stocks like AMZN could again feel the worst of it.
Universal Thinking on Amazon Stock
I’m perhaps revealing my contrarian nature with this one. But this happens all the time: When everyone is sure of something on Wall Street, everyone is usually wrong. It happened just before the dot-com bubble burst, when every cab driver and bell hop was invested in internet stocks until the bottom fell out. Similar excess led to the subprime mortgage crisis and subsequent recession and market crash. That kind of group thinking can get individual stocks in trouble too: People were so sure that Facebook, Inc. (NASDAQ:FB) was going to be a smash-hit right out of the gates when it came public in May 2012. But the overzealousness drove the IPO price up to unsustainable levels. FB lost more than half its value before the summer was out.
I doubt Amazon stock will perform a similar face-plant. But the fact that it’s “Almost Impossible to Find a Bear” on AMZN probably means there aren’t many buyers left, and any crack in the armor could turn a few of those myriad bulls into bears.
Don’t avoid or start selling off Amazon stock based on these possibilities. But also don’t be shocked if AMZN encounters some short-term turbulence in the coming months.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
