Wait For Rates To Stabilize Before Buying The Dip In Amazon Stock

$1,820 is the key level to watch in Amazon stock

Why Amazon Stock Could Be Hurt by a Lack of Focus

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The 10-year Treasury yield is breaking out to nine-year highs, and the stock market is consequently plunging. The logic is simple. As rates rise, that both dilutes the present value of down-the-road profits and decreases the attractiveness of equities relative to bonds. Thus, when rates rise, equity valuations are pressured, and stocks fall.

Among the biggest decliners are the market’s hyper-growth leaders. And, in that group, the poster-child for hyper-growth in the bull market is Amazon (NASDAQ:AMZN). Much like its hyper-growth peers, AMZN stock has been hurt badly in this recent market sell-off. As of this writing, shares just entered correction territory (a 10% plunge from recent highs).

But, I think this recent weakness is nothing more than a healthy and necessary valuation reset in an otherwise still very strong long-term growth stock. Nothing about Amazon’s fundamentals has changed over the past few weeks. If anything, they’ve improved. Those fundamentals, as a whole, pave a path for Amazon to be worth $2 trillion in five-plus years.

A Different Market

What has changed is the stock market backdrop. Rates are rising. That pressures equity valuations. It especially pressures growth equity valuations, which typically have low earnings yields and derive most of their value from down-the-road profits. Amazon is a prototype of this “valuation based on the future”. As such, AMZN stock is a big loser when rates rise.

Eventually, Amazon stock will resume its upward trend. But, that won’t happen until rates stabilize and the shares find technical support. Thus, investors should probably wait to buy the dip on AMZN.

Fundamentals Remain Strong

Across the board, the fundamentals supporting Amazon.com stock remain strong.

Despite being the elephant in the room that disrupted the entire retail circus, Amazon’s own retail business is still relatively small. Combining SEC filings with Deloitte top 250 retailer market share figures, I peg Amazon’s current portion of the global retail market at just 3.5%. That compares to Amazon’s control of 50% of the U.S. e-commerce market. If the rest of the world’s retail landscape starts to look like the U.S. e-commerce landscape, Amazon has a ton of room to grow market share.

Amazon Web Services (AWS) has even more growth potential. Using SEC filings and Gartner public cloud market data, I peg Amazon’s market share in the entire public cloud market at just ~11% (AWS revenues of $17 billion last year, versus a global cloud market of $154 billion). That share has potential to grow over the next several years while this whole market expands at a 20%-plus clip. Thus, AWS is equipped with mega-growth potential over the next five-plus years.

Meanwhile, Amazon advertising has huge growth potential. While it has one of the most visited websites in the world, its digital advertising business is anemic next to the digital ad businesses supporting the world’s other top-visited sites. If Amazon can just capture a healthy portion of the near $1 trillion advertising market, then this company’s ad business will grow by leaps and bounds over the next several years.

Put e-commerce, cloud, and advertising together, and you have a really robust growth narrative supporting Amazon stock. Add in potential catalysts from offline retail, e-pharmacy, smart home, and logistics, and you are talking about perhaps the best growth narrative in the entire market. Because of this, AMZN stock should weather any and all near term volatility, and ultimately head higher in a long term window.

Rising Rates Create Valuation Friction

Right now, Amazon stock is facing near term volatility due to rising rates. Because rates aren’t showing any signs of stabilizing yet, AMZN stock likely won’t stop bleeding any time soon.

Eventually, though, those rates will stabilize. That isn’t to say the 10-year Treasury yield will stop its ascent. It won’t. Inflation has arrived at the party, and the Fed is as hawkish as ever. That combination means the 10-year will keep heading higher.

But, it is to say that a rising 10-year won’t continue to freak out the market. Right now, that rate is climbing with such conviction that stock market investors are worried. Once this velocity dies down, as it always does, and the 10-year starts advancing at a gradual pace, the stock market should find its footing again and Amazon stock should rebound.

Pay Attention To $1,820

The level to watch in Amazon stock is $1,820.

Amazon stock has broken its 50-day moving average. This isn’t unusual. Over the past two-plus years, AMZN stock has broken its 50-day moving average several times. But, each time, the shares found a bottom at the 100-day moving average. Either the stock bottomed there and proceeded to bounce-back quickly, or the stock consolidated around the 100-day for a few weeks to months before resuming the long-term uptrend.

As such, the 100-day moving average is the critical level to watch here. The 100-day currently sits at $1,820. Drops towards that level should be viewed as buying opportunities.

Bottom Line on AMZN Stock

This is a long-term winner undergoing some near-term volatility. As such, near-term weakness is a long-term opportunity. But, investors should be patient and not buy the dip too early. Right now, investors should wait for the 10-year to stabilize and for AMZN stock to test and hold its 100-day moving average around $1,820. If both of those things happen, then that would be the signal to buy the dip.

As of this writing, Luke Lango was long AMZN.

Article printed from InvestorPlace Media, https://investorplace.com/2018/10/wait-for-rates-to-stabilize-before-buying-the-dip-in-amazon-stock/.

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