Investing is a combination of homework and a bit of luck. But for some rare stocks like Amazon (NASDAQ:AMZN), it seems like a no-brainer to just buy it and hold it forever. Year-to-date it’s up 25%. In two years it is up 94%, and in five years it’s up 455%.
But it’s never as simple as it seems, because this is a momentum stock that moves fast in both directions. So today we look into the Amazon thesis for the rest of the year and into 2020.
A Deeper Look at Amazon Stock
First The Fundamentals. This is a company that always sounds expensive but it never is, because it is the ultimate growth startup business. Yes, the company is old, but it keeps reinventing itself and adding new businesses. These provide completely new sources of income, thereby simulating many micro-start-up companies within Amazon. For the longest time the bears failed to recognize this fact and shorted it based on traditional valuations. As a result, AMZN stock left many bears in financial ruins.
It sells at an 80x trailing price-to-earnings ratio so yes, it is expensive from that perspective. But since it is a growth company, I don’t worry so much about the profitability level. AMZN is supposed to overspend in order to continue to deliver tremendous growth. Moreover they also proved to Wall Street that they are profitable and that they can dial that up on demand.
But therein lies a hidden aspect of my long-term bullish thesis on Amazon stock. This company will surprise everyone with the level of profitability that it will have going forward. Investors may be underestimating the licensing revenue that AMZN will get from their Alexa products. This will flow straight to the bottom line. It is inevitable that we have a trend that will heavily incorporate voice-activation into our daily lives. Meaning in the near future we will be talking to our appliances at home and at our cars while we are driving just to name two examples.
The cost of research and development for Alexa is done so the incremental integration expenses are minimal and usually fall on the licensee. This leaves Amazon management awash with cash to fund even more exciting new ventures to wow us. They thought about drone-deliveries before it was cool; in fact the initial reactions were ridicule. No one is laughing now they are all playing catch-up.
AMZN is now a legitimate contender in shipping. It is serious enough to seriously worry FedEx (NYSE:FDX) stock. FDX stock is worried not only because Amazon pulled its services from FedEx, but because it’s competing with them going forward.
Who’s to say that they won’t go after Uber (NYSE:UBER) next? Their van delivery model can easily be turned into a people mover company. So why not Amazon chauffeur by next year?
I know this sounds ridiculous but no one saw AWS before they took the entire market by storm. Yet I am sure it sounded silly as an idea back then. The point is this is a proven team that can find new ways of making money and disrupt existing industries. So there is absolutely no reason to doubt it going forward. Those shorting it now are really shorting the entire market because if the S&P 500 is higher down the line then Amazon stock is leading it.
Amazon’s Technicals
The stock has been trading inside of a wide range for the past 12 months. This could be a consolidation period before the next big move. So is it a good time to buy it now? If your timeframe for the investments is long-term, then this is indeed as good a time as any. It is futile to try to fish for the perfect entry point because momentum stocks like this do not give us a clear sign. When they run, they run really fast and in both directions.
Short-term, if Amazon stock goes above $1,960 dollars per share then it would trigger a bullish pattern that could target $2,100 or higher. Conversely, below $1,690 per share and it could trigger a sell program for another 200 points from there. But even then, the Christmas correction from last year gives us a solid floor because sentiment then was horrendous.
This time it won’t be as bad because because we have the backing of all central banks, including the Federal Reserve. If things get bad, they will cut rates and more than once. Yesterday, investors threw a mini fit because Jerome Powell didn’t actually commit to the cut during a speech, but he wasn’t supposed to do it yet. Yesterday’s event was not an official federal reserve meeting and it would have been an improper place to announce any action. It is enough to know that the safety nets is there so then the sellers would not have conviction. Yes, there will be red days, but they’d be buy-able dips.
The bottom line is Amazon stock has been a buy for over a decade and this is not likely to change anytime soon. The bullish thesis remains intact if not stronger now more than ever.
For those who like trading options, there are dozens of way to go long Amazon with big safety nets. For example I can sell the October $1,400 foot and collect $8. All I need to win is for Amazon stock to stay about $1,400 per share between now and mid-October. Otherwise my break-even point is at $1,392.
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. Join his live chat room free here.
