As U.S. and China trade tensions escalated in May, financial markets went lower. Ever since U.S. President Donald Trump fired off a tweet about raising tariffs on China, the S&P 500 has shed nearly 4%. Importantly, the sell-off has not been narrow. Pretty much every stock outside of the defensive sector dropped in May. This includes shares of ecommerce and cloud giant Amazon (NASDAQ:AMZN). Since the infamous Trump tweet, Amazon stock has shed 6%.
But, does that really make sense? After all, Amazon has relatively mitigated exposure to China, so should the stock really be an under-performer against the backdrop of rising trade tensions?
Quite simply, no. Amazon stock should not have under-performed in May.
But it did, and this underperformance has created a contrarian buying opportunity for long term investors. Amazon will ultimately recover from near term trade-related weakness. In the long run, innovation and growth will ultimately power this stock way higher than where it trades today.
Amazon’s Fluke Underperformance
With respect to recent weakness, Amazon stock should not have underperformed in May because the company’s exposure to the trade war is relatively mitigated.
Broadly, there are two reasons why Amazon dropped in May. Both of them are trade related. First, rising trade tensions mean falling consumer confidence (normally), which means lower global retail sales and less growth for Amazon’s e-commerce platform.
Second, if in place for a long time, higher tariffs will lead to higher consumer prices in the U.S. Higher consumer prices in the U.S. will spark inflation throughout the economy, which will get the Fed to come off the sidelines and hike rates. That will provide downward pressure on equities and consumer confidence, and is especially bad news for a consumer-focused, richly valued name like AMZN stock.
These two concerns, while legitimate, are overstated.
Trade tensions aren’t bad enough yet to where they are weighing on consumer confidence. Consumer confidence in the U.S. ticked up in May, topped expectations, and is now back to Fall 2018 levels, which were 18 year high levels. Because consumer confidence hasn’t dipped, neither have retail sales, which rose 2.8% in April, versus a 3 month moving average of 2.7% year-over-year growth. Thus, trade war issues aren’t bad enough yet to where they are rearing their ugly head in consumer confidence and spend levels.
Further, inflation remains muted. Core PCE growth is below 2% and falling, mostly because there are multiple deflationary forces throughout the U.S. economy. In order to offset those forces, you would need tariffs to stay big for a lot longer. That probably won’t happen, because both sides want to get a deal done. Thus, inflation projects to remain muted for the foreseeable future.
Amazon Stock Will Recover
While trade concerns related to Amazon stock are overstated, the favorable fundamentals supporting this stock are understated.
Specifically, there have been multiple positive developments with respect to Amazon and its multiple growth verticals over the past several weeks and months. There was a favorable Cowen survey which showed that Amazon Web Services customers are more likely to increase spend on AWS than customers of other cloud platforms.
There has also been a huge one-day delivery push on the ecommerce front and an equally big push into automated warehouses to make one-day delivery a reality without cramping margins. Amazon has also jumped into the food delivery game with a big investment in Deliveroo. It has expanded its presence and capabilities in the Indian ecommerce market and scored a big partnership with Adobe (NASDAQ:ADBE) on the decentralized direct commerce front.
It’s also worth noting that Amazon’s Fire TV platform now has more users than Roku (NASDAQ:ROKU), making Amazon a front-runner in the secular growth advertising-video-on-demand (AVOD) space. Growth in AVOD would be a nice complement to what is already a burgeoning digital ad business at Amazon.
Overall, then, Amazon’s innovation pipeline remains as robust as ever. So long as that remains true, Amazon will remain a big revenue growth company. Importantly, a lot of Amazon’s new growth is coming from higher margin businesses, so margins are running higher, too. Thus, Amazon today is a big revenue and profit growth company.
Ultimately, this huge profit growth trajectory will keep Amazon on a winning track, meaning near term trade related weakness is nothing more than a buying opportunity.
Bottom Line on Amazon Stock
Amazon stock underperformed in May against the backdrop of rising trade tensions. It shouldn’t have. This disconnect creates a compelling buying opportunity. Over the next few weeks, Amazon will recover. Then, over the next few years, the stock will continue to head significantly higher.
As of this writing, Luke Lango was long AMZN, ADBE, and ROKU.
