Amazon (NASDAQ:AMZN) has experienced a resurgence. After a brutal selloff in the fall, Amazon stock has enjoyed a 20% recovery from its Christmas Eve lows. Now, as the company unveils an improved Amazon Echo at CES, many now wonder if the recent move higher constitutes the beginnings of a recovery or a bear market bounce.
Amid the bear market decline, Amazon stock saw in the fall, valuations have come out of the stratosphere. In fact, projected profits more than quadrupled in 2018. As a result, the forward price-to-earnings (P/E) ratio has fallen out of the triple digits and now stands at just under 60. Between the lower P/E and the 23% decline in AMZN, many will wonder whether they should buy.
Amazon Stock Enjoyed a Post-Christmas Rally
Recent action in the stock will tempt buyers. Amazon stock has risen steadily since the brutal Christmas Eve selloff. Also, as of the time of this writing, we await the likely release of an improved Amazon Echo at CES. The company currently engages in a heated battle with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and the Google Home for market share.
Despite the Echo-driven anticipation, retail growth likely drove the recent surge in Amazon stock. Its core retailing division saw Alexa voice shopping triple and Prime ship more than one billion items in the U.S. alone. Two years before, Amazon reported more than one billion Prime sales across the planet.
Still, all the retail-driven excitement calls for some perspective. The majority of AMZN profits actually come from its cloud product, Amazon Web Services (AWS), not in selling goods. However, cloud growth remains on fire, even as Microsoft (NASDAQ:MSFT) and other firms challenge its leadership in this space. Also, its digital ad revenues continue to grow by 100%, setting up a showdown with Google and Facebook (NASDAQ:FB) in this lucrative niche.
Amazon Stock … Neither a Buy or a Sell
As a result of this news, my long-time bearish view on AMZN stock has evolved. I do not encourage prospective buyers to get in after the recent surge. However, with the lower P/E and the expected growth levels, I am no longer urging investors to sell. No, profits will not quadruple again in 2019. Still, Wall Street forecasts 44.3% average growth per year, over the next five years.
Moreover, Amazon stock may have reached its near-term trough. I think if we retest that Christmas Eve low of $1,307 per share, or at least see more stability, it could be time to buy AMZN.
The only reason I do not encourage investors to buy now involves the overall market. Extreme daily swings usually indicate stocks have more room to fall. Also, we could see the “sell the news” phenomenon come into play after the product releases at CES. Additionally, the multiple on AMZN remains elevated. This makes it vulnerable in a generalized selloff. Given these factors, Amazon stock would likely continue to move in the same direction as the S&P 500.
The Bottom Line on Amazon Stock
We do not yet know whether to define the recent surge in Amazon stock as a bear market bounce or the beginning of a recovery. For this reason, investors should wait to buy AMZN.
To be sure, massive profit growth and a stock price decline have redefined the value proposition on Amazon stock. Still, investors need to consider that the good news on the retail front affects only one of its smaller profit centers. Moreover, between the surge in AMZN and a likely “sell the news” reaction coming after CES ends, the equity could easily see a near-term decline.
However, the long-term picture for Amazon stock has significantly improved. Once the selling in the overall market stops, investors can benefit from the massive growth of AMZN at a greatly reduced price.
As of this writing, Will Healy did not hold a position in any of the aforementioned securities. You can follow Will on Twitter at @HealyWriting.
