Investors often seek companies that disrupt how the world does things because they usually are game changer. Amazon (NASDAQ:AMZN) is the one that has done that the best. For over a decade, AMZN has completely changed the status quo of several industries.
For example, the retail sector as we knew it will never be the same. Giants like Macy’s (NYSE:M) and Target (NYSE:TGT) have been trying for years to solve the AMZN riddle but are still falling short. One thing is for certain: They are all trying to emulate AMZN, but most are falling short … so far.
But while all of this is happening in retail, Amazon has also disrupted many other industries. The sheer rumor of AMZN entering a business causes immediate dumps of those stocks in it. This happened to drug stores, and transportation companies like Fedex (NYSE:FDX).
Under the incredible leadership of its founder Jeff Bezos, AMZN also invented new sources of income and took the world by surprise. Most notable was AMZN’s foray into the online services and as a result, it is now the dominant force in the infrastructure that we know as the cloud.
In summary, this is a company that has never stopped from growing. I consider it the perpetual startup company. So for years, Amazon has left a pile of financial ruins of those who tried to short the stock.
For a long time, the experts wrongly insisted that Amazon stock was expensive because of its thin margins. But their mistake was to evaluate it from a profitably perspective.
When I evaluate a hyper-growth corporation, I don’t require it to be profitable. AMZN needed to spend in order to grow as fast as it did. If I cover up the name, I’d consider it still a startup but one that actually generates its own cash to burn where it needs it.
Well, now that AMZN is more in control of its margins, that argument is gone. Unless the financial markets collapse, I have no doubt that for the long-term Amazon stock will be higher in the future. So from that perspective, it is not important to time the entry into AMZN stock.
But since it’s not cheap to own the shares when they cost $1,625, then it would be best to choose decent levels to start a position and not to lock up a giant pile of cash into a trade at risk.
How to Approach Amazon Stock Now
Fundamentally, AMZN stock sells at a trailing price-to-earnings ratio of 82. While that sounds expensive, it’s not extravagant. This is a company that has always demanded a high valuation and it has always earned it. Yes, its P/E is more expensive than Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Facebook (NASDAQ:FB) combined, but it’s still 20% cheaper than Chipotle (NYSE:CMG) stock.
Technically, AMZN stock is a momentum stock so it moves fast in both directions. The scoreboard suggests that holding it through the eventual dips pays off. Less than two years ago, buying the dip to $800 was risky, yet here it is more than double that.
For the short term, there is risk under $1,550. If the bears can push prices below it, they could invite momentum sellers to retest recent lows from last year. But there should be some support around $1,440 per share. Besides, for that to happen there will also need to be a market-wide correction in equities. Meaning AMZN alone won’t likely correct while stocks are rising.
Conversely, if the bulls can slog up through this resistance zone and overcome $1,710 per share, it can trigger a bullish pattern that would target the $1,810 area. This would be a tough spot from early December. Those tend to be resistance on the way up, but they also provide catalysts for bulls.
It is important to note that the sentiment on Wall Street has soured a bit. We have politicians playing whack-a-mole with the headlines. And we have a Federal Reserve that won’t shut up. Just this weekend the sitting Chairman found it appropriate to do a television interview and more public appearances scheduled. So headline risk is high and it could cause more equity market selloffs that will take down all stocks, including Amazon stock, but in the long run, those too would pass.
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.
