Since becoming one of the first U.S. companies with a market cap of over $1 trillion early last September, Amazon (NASDAQ:AMZN) stock has fallen from an all-time high of $2,050.50 on Sept. 4 to an intraday low of $1307 Dec. 24. Within the past six weeks, the stock has rallied over 20%. Amazon stock closed at $1640 on Feb 13.
Investors’ mood change since the end of the summer months not only around Amazon but also regarding most technology stocks has been rather stark as fear and uncertainty have replaced jubilation.
I expect AMZN to stay rangebound in the near future. Thus Amazon stock may not go back up to the $1 trillion market cap any time soon.
Slowing Growth as Amazon Matures
When Amazon reported earnings on Jan. 31, Wall Street did not love what it heard as the results came short of revenue forecasts. The estimates have been for about 20% quarterly growth for 2019, whereas the actual first quarter numbers showed a more subdued 13.5% growth.
Amazon’s current revenue comes from five main segments:
– Retail Products (about 67% of revenues)
– Retail Third-Party Sellers (17% of revenues)
– Amazon Web Services, AWS (about 9% of revenues)
– Subscriptions such as Amazon Prime (about 5% of revenues)
– Other, such as credit card agreements (about 2% of revenues)
The quarterly results revealed that Amazon’s online store and third-party sellers, as well as subscriptions, have been seeing lower growth. Analysts further noted that Amazon Web Services were not growing as fast as expected, in a manner to offset the declines in other segments.
The company also said that it expects its investments to increase, another factor that is likely to increase costs and affect the bottom line in the near future.
Amazon is expected to invest heavily in its advertising business, Prime video, international growth as well as shipping and logistics. Although these investments will propel the company for its next phase of growth, it might take several quarters for shareholders to see a substantial increase in the stock price.
As a result, the Amazon has indeed been stuck in a range over the past two weeks.
Amazon Stock as a Battleground
Now that the earnings season is behind Amazon, daily volatility in the shares and many other tech heavyweights will depend on macroeconomic news as well as the action of big day traders.
In other words, in the next couple of weeks, I expect AMZN to be a battleground between two camps: long-term investors and day traders. Investors are hopeful that the company will be able to grow revenues, embrace new technologies, and continue to disrupt the status quo.
Bulls further call attention to how fast the stock has come back since Dec 24.
On the other hand, bears will be happy to point out that many of Amazon’s big business units are showing slowing revenue growth and hence there is now a need to re-adjust the company’s valuation.
Recent weeks have also seen Amazon shares become negatively affected as news surrounding the personal life of CEO Jeff Bezos hit the wires. If such personal saga continues to dominate Amazon headlines, some investors may decide to wait on the sidelines until the dust settles.
Meanwhile any daily update on the tariff wars between the U.S. and China, potential Fed rate hikes in 2019, the reaction of the European markets during the final phases of “Brexit” — the U.K.’s departure from the European Union (E.U.) on Mar. 29 — and any other global political tension, say in Venezuela (with its effect on commodity prices, such as oil) will give traders plenty of opportunities to move the stock in either direction.
For example, in the case of a swift resolution to the U.S.-China trade wars in the coming weeks, the AMZN stock price will likely have a rapid 4-5% move upward. Yet, if the U.K. crashes out of the E.U. without a trade deal, the U.S. markets are likely to follow the European markets, which would undoubtedly see an initial sharp fall.
Therefore, until the next earnings report in late April, I expect AMZN stock to trade in a range, between $1700 and $1500.
Short-Term Technical Analysis
Within this price range, I regard the $1625 area as a crucial point in the battle between the bulls and the bears.
If Amazon shares fall below $1625 and then below $1600, a sharp drip to $1500 or even below would also come rather quickly.
On the other hand, if it can stay above the $1625 level, it is likely to test $1700 and above shortly.
For those investors who pay attention to short-term technical charts, with the increase in the stock price, Amazon’s momentum indicators, which describe the speed at which prices move over a given period, went into overbought territory. After the release of the quarterly results, short-term profit-taking has kicked in, and bullish momentum has started fading.
In other words, I am more bearish on the stock in the short-term and I believe a move towards the low $1500 is possible.
This current short-term chart follows several months of price decline which has caused a longer-term damaging technical picture. Therefore, Amazon stock will need to stabilize and build a base again before another long-term sustained leg up can occur.
Is It Time to Invest in Amazon Stock?
The answer depends on your evaluation of the fundamentals of the Amazon as well as your time horizon.
If you already own AMZN, you might want to hold your position. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point.
When Amazon reports again in two months, investors will scrutinize its fundamentals. If the results show slower growth, investors may decide that Amazon is now a maturing company whereby the current stock valuation is too high to justify the current stock price.
Nonetheless, it is important to remember that a mega company with fundamentals as robust as Amazon’s could withstand several months of uncertainty. And, eventually, management would make the proper decisions to move the company forward.
Therefore, patient investors who continue to believe in the AMZN story may see any price dip towards or even below the $1500 level as an opportunity to go long AMZN stock and ride out the daily volatility.
In two to three years, I expect these investors to be rewarded handsomely. Eventually, fundamental catalysts will drive the Amazon share price higher, and the stock price will break over $2000 again.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.