Why Amazon Stock Will Break Out of Its Trading Range

Amazon.com stock is in a holding pattern despite the company finishing the holiday quarter on a strong note. Shares are set to break out.

Source: Amazon

After rewarding shareholders with modest stock gains in the last year of about 8%, Amazon.com (NASDAQ:AMZN) continues to dominate in nearly all the businesses it enters.

Why Amazon Stock Will Break Out of Its Trading Range
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What makes the online retailer so tough to beat? Does it owe its success to leaning its moat from AWS, its cloud business? Or is there more to it?

Huge Online Presence

Amazon.com’s strong online presence, such as through its retailing site or by streaming content, attracts plenty of advertising revenue. And don’t forget about IMDB.com, its internet movie database unit, which drives plenty of website traffic.

IMDB launched FreeDive, whose ad-supported free streaming video channel is bringing in more advertising dollars.

In the last quarter (Q4), advertising decelerated to 97%. That is still a very strong, year-on-year growth number. Amazon owes strong ad dollars growth to solid adoption across its vendors, sellers, and authors.

Thanks to the diversity of its business, the company attracts advertisers from all types of markets.

Physical Store Underperformance.

Amazon did report one weak data point its business: physical store revenue. Sales fell 3% year-over-year due to its Whole Foods unit. Still, this includes Amazon Books stores, Amazon Go and Amazon 4 star. If the company changes its metric by including online orders where people use their Prime Now app, that year-on-year physical store sale number changes. So if the customer orders for delivery or pick up at Whole Foods stores, Y/Y sales would be up 6%.

Growth Catalysts

With the holiday season now behind it, Amazon may not have any near-term growth catalysts. When it lowered its free shipping threshold ahead of the fourth-quarter holiday period, that may have driven sales higher. Beyond that, Amazon will likely ship more and more Alexa devices in 2019. Home assistants are still a novelty and are not any every household. There is a growth opportunity in growing device sales, which in turn could drive Prime membership and shopping activity at Amazon’s site higher.

Wall Street Projects 28% Upside in Amazon.com Stock

Per Tipranks, the average price target on AMZN stock is $2,125, implying an upside of 28%. Conversely, on Feb. 14, Citi replaced Amazon with Alphabet (NASDAQ:GOOG) as its top pick. Citi cited strength in YouTube and mobile search for the switch. It also thought that Amazon canceling the New York headquarters and the Jeff Bezos’ affair scandal are negative developments.

The problem with this top pick switch is that Google’s growth is limited worldwide. It reported some $5 billion in revenue in Asia but this could be due to ad sales in Hong Kong and vicinity. Google has no access to China’s market, which would limit the revenue growth upside for the search giant.

The affair scandal involving Amazon’s boss is a non-event because it will not have an impact on Bezos’ ability to lead the company. Amazon will continue to innovate its site, leverage the low cost of AWS, and deliver on selling goods at costs lower than its competitors.

Risks

Amazon’s revenue grew 44% in the fourth quarter while CapEx grew 17%. In Q1 last year, CapEx grew 33%. 2018 was also a lighter investment year, so the lower costs may have helped lift the stock price. Although this cost figure varies quarterly, Amazon could report a usually larger cost basis that will hurt profits. This could dissuade investors from continuing to hold AMZN stock. Weaker may face ongoing gross margin due to higher shipping costs, including free shipping. AWS, though, will limit the drop in gross margin.

Bottom Line on Amazon Stock

Amazon is trading in a range of between $1500 to $1700. Valuations are not a concern because the market traditionally assigns a high P/E multiple for the stock. Chances are good that the stock could break out above the trading range when it reports results next quarter. Strong AWS revenue, higher Alexa shipments, and higher online sales will set the stock back to yearly highs.

As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/why-amazon-stock-will-break-out-of-its-trading-range/.

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