Momentum stocks like Amazon (NASDAQ:AMZN) rarely give us a clear point of entry. They trade fast and long so they lead in both directions. On the way up they look like they’re perpetually waiting for a pullback. Conversely on the way down they seem headed into an abyss like this morning for example. But there’s more to Amazon stock than that.
Since the September highs, the stock has fallen off a cliff, correcting 30%, but this problem isn’t specific to Amazon stock. Sure, the earnings could have been better but this is still a company that’s firing on all cylinders.
Amazon Stock and Over-Valuation
Amazon has set the norm for all other retail companies to follow for decades to come. Moreover, it now dominates the cloud with over 90% market share. Mega-cap tech giants like Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL) and IBM (NASDAQ:IBM) are playing catch-up and no one is even close to the penetration of the Amazon Web Services.
We now depend more on technology than ever and demand is growing exponentially. So this is a trend that’s not going to change.
A 30% correction is nothing new to Amazon stock. Every time we see one, though, the critics call for the demise of this behemoth. The management team has proven itself more than once, so they deserve the benefit of the doubt this time around as well.
The critics have developed a habit of doubting its valuation. It sells at about 100 price-to-earnings ratio which is aggressive but not for a company that grows as fast as this one does. Moreover, Amazon does it while remaining profitable so it’s proven that it can dial-up the margin wick anytime it wants to. It doesn’t burn cash it doesn’t have.
Amazon Stock and the World Economy
Along the way, they made smart acquisitions and important alliances the tie themselves to the brick and mortar business, which it almost killed. Now every retailer on the planet is trying to grow their online sales in order to avoid extinction. I bet that they’re not taking sales back from Amazon but rather moving their own foot traffic on to online so that they don’t lose more of it.
In short this is one competitor that is sure to prosper for years to come. This dip is an opportunity in the long run.
The current market-wide malaise made this ride rougher than it should have been for AMZN. I doubt that the stock would have fallen this far if it wasn’t for the entire NASDAQ also correcting 15% from the highs. If the equity markets in general stabilize, Amazon will also be leading the bounce back up.
There are risks. Investors fear three egos who are in control of this global stock market route. On the one side we have a tariff war between the U.S. and China. And on the other side we have a U.S. Federal Reserve that’s intent on tightening rates regardless of evidence of a global slowdown.
Luckily neither situation is at the point of no return, but we are darn close. Cooler heads should prevail because all parties involved have a lot to lose.
U.S. President Trump wants to claim victory over an improved economy. Chinese President Xi does not want to be the one to isolate China from the rest of the world. And the Federal Reserve does not want to waste 10 years of effort digging the U.S. economy out of its lump only to bring it back down into another one again.
The Bottom Line on Amazon Stock
The Santa Claus rally looks doubtful at this point but I remain hopeful. Given that hope is not a strategy, I suggest building positions in great stocks during this period of uncertainty but one small bit at a time. Especially for stocks with a high ticket price like Amazon’s.
I know for sure that I won’t be hitting the very bottom of my entry into any stock except by luck. However, I can do my homework and make sure that I’m not entering into an assured financial debacle. Over the long-term, I am confident that Amazon stock will be higher then now.
In addition, AMZN stock has technical risk just below current price. If it loses $1475 per share it could trigger a sell signal to target another $200 dip. I can guard against it by investing some protection by using AMZN December put spreads.
Critics also wrongfully consider Amazon to be an online retailer. Even now when it is clear that they are a tech company. Under their founder and CEO Jeff Bezos they are not a one hit wonder. By the time the rest of the tech world catches up with them in the clouds, they will will already be onto the next big thing.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
