I’ve been as big a bull on Amazon.com (NASDAQ:AMZN) as pretty much anyone over the past couple of years – and even I can’t believe how far AMZN stock has run.
So far this year, AMZN has gained about 61%. It has added an incredible $348 billion in market capitalization in less than eight months. As I wrote last week, to put that figure in perspective, that $348B is nearly the entire market cap of Johnson & Johnson (NYSE:JNJ), the 11th most valuable company that’s traded on U.S. markets.
It’s a stunning move. It’s stunning even given that I argued last year that Amazon would become the world’s most valuable company. Certainly, I didn’t expect Amazon to challenge for that title so soon; its market cap now is about 10% below that of Apple (NASDAQ:AAPL), the world’s first trillion-dollar company.
Even with a ton of good news, it’s easy to wonder if AMZN stock isn’t due for a breather of some sort. The valuation of AMZN stock is high, even though, as I’ve long argued, investors need to look beyond just the price-earnings multiple when valuing AMZN. The gains have been enormous. And even with a ton of good news so far in 2018, I have to wonder just how much steam is left in the AMZN rally.
Can AMZN Stock Correct?
A long-term chart of AMZN stock (see below) seems to show a stock that has simply moved directly higher for the past decade.
But there have been some corrections along the way. AMZN stock lost about 25% of its value from its October 2011 peaks to its lows in December of that year. It dropped by about 25% in the first ten months of 2014. In the market correction of early 2016, AMZN stock declined almost 30% in less than two months.
Even this year, AMZN stock struggled for a brief spell when President Trump took aim at the company. The stock fell 15% in less than a month.
And this is a dearly valued company. The high price-earnings multiple can be explained by its thin margins and the billions of dollars that the giant invests in its businesses. Still, that’s an easier story to buy in a market at all-time highs rather than one full of nervous investors. Whether it’s a broad market correction, or just a growing sentiment that Amazon stock has gone too far, too fast, history shows that AMZN can pull back sharply and quickly.
Will AMZN Stock Correct?
Of course, every one of those pullbacks has proven to be a buying opportunity. And even at the current valuation, the simplest strategy seems to be to stay long or go long.
After all, the Amazon story seems to get stronger every month. Its Q2 earnings crushed expectations – and showed the company’s ability to grow its profits even while it’s investing a great deal in an effort to build future businesses. Amazon’s advertising enterprise has gone from a potentially high-margin niche business to a huge part of the bull case. Online advertising kingpins Facebook (NASDAQ:FB) and Alphabet (NASDAQ:GOOGL,GOOG) are very much at risk, as Brad Moon argued last month.
Amazon Web Services is still dominant in the cloud. The integration of Whole Foods appears to be progressing. Echo and Alexa are in the early stages of growth. And the legacy e-commerce business is showing no signs of slowing down. The fact that Amazon’s revenue is still growing 20%+ annually on an organic basis is something close to incredible.
A correction in AMZN stock that’s worth waiting for won’t occur unless the story breaks down somehow. Either the market as a whole needs to correct or competitive fears have to creep into the Amazon story. And there is one potential competitor that could trigger such fears.
How Big a Threat Is Walmart (Again)?
The only real competitor to Amazon at this point is Walmart (NYSE:WMT). And for a while, investors and analysts were arguing that the brick-and-mortar giant was becoming a worthy adversary. That argument seemed to have been refuted after Walmart plunged following its Q1 earnings. But the giant retailer’s Q2 beat reinforced confidence in Walmart’s omnichannel strategy. WMT stock subsequently soared, although it has pulled back lately.
As solid as Walmart’s performance has been of late, I’m skeptical about its ability to really compete with Amazon. The companies can certainly coexist; Amazon isn’t going to put Walmart out of business. But Amazon has spent two-plus decades growing around and through competition from Walmart – and everyone else.
So what, then, could undercut the AMZN rally? Other than a market correction – or at least a shift from growth stocks to value stocks – it’s hard to see a stumbling block. That, in turn, means that AMZN very well may have a path to becoming the second trillion-dollar company, even if it ‘feels’ like the run has to end at some point.
As of this writing, Vince Martin has no positions in any of the securities mentioned.