Amazon’s (NASDAQ:AMZN) valuation used to be a pretty big talking point. “It doesn’t make any money!” “The P/E multiple is in the thousands!” How many times did we hear about that? Too much. Making matters worse for the bears, Amazon has gone on to become one of the largest companies in the world.
It’s forced many of those investors to finally acknowledge that AMZN stock is instead a buy, although there are different opinions on when to do it.
Dip-Buying on Amazon Stock
Many years ago, I was skeptical of AMZN stock because of these valuation concerns. In hindsight it’s easy to laugh about it. But at the time, it was defying all historic valuation metrics.
Those fears kept me from buying aggressively, which was a mistake looking back on it. However, its momentum and strong price action kept me from ever shorting the e-commerce giant. Further, it’s one of my favorite deep-dip stocks to buy on big corrections.
When we see huge stock market corrections, we tend to get larger-than-average pullbacks in AMZN too.
In early 2014 and 2016, AMZN stock took a roughly 30% fall. In the fourth quarter of 2018, shares fell almost 40% from peak to trough. Not many investors will snag the bottom but being cognizant of these types of corrections is important.
More mild corrections (15%-plus losses) happen in between the big ones. So, while it may be tempting to buy a few AMZN shares when the stock is rallying and analysts are slapping $2,500 price targets on it, bigger dips are investors’ real friend.
Right now, Amazon stock is 14% off the recent highs. It’s also into a key level of support, as you’ll see below in a moment. Should it correct back down to $1,400, a major support level in 2018, it will be 31% off its highs.
The bottom line? When the stock market is in irrational sell-off mode, keep Amazon stock on watch. Down 30% or more doesn’t come around often, but it’s a good time to nibble when it does.
Trading AMZN Stock
At $1,770, Amazon stock has a number of support levels just below current prices. The prior Q4 highs and the recent lows from earlier this month are nearby. There’s also the 38.2% retracement and the 200-day moving average. Finally, there’s uptrend support for 2019 (blue line).
If all of these levels give way, the 50% retracement near $1,675 is in play, with the 61.8% retracement near $1,600 below that. In between — at $1,628 — AMZN will be 20% off its recent high. At $1,424, the Amazon stock price will be 30% off the recent high and just above key support.
Bottom Line on Amazon
Amazon now commands an $875 billion market capitalization, although at one point it was north of $1 billion.
Just look at the continued onslaught we’re seeing in traditional retail. Department stores like Macy’s (NYSE:M) are getting crushed, while J.C. Penney (NYSE:JCP) is on the brink. There are some that are not only surviving but thriving, such as Home Depot (NYSE:HD) and Costco (NASDAQ:COST). But for the most part, it’s quite clear e-commerce is the present and the future.
That bodes well for names like Amazon and Shopify (NASDAQ:SHOP). But Amazon’s business goes much further than that.
It’s got one of the largest cloud businesses in the country, outmuscling names like Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL). Its digital advertising space has quickly grown into a behemoth in its own right.
Put simply, AMZN is a tech giant with a sprawling reach across the digital world. It may not be cheap — although it’s cheaper than its historical comparisons — but it’s one of those names you buy on deep pullbacks. They may only come around once in a while, but those are the times to pounce.
Amazon is forecast to grow revenue about 20% this year to roughly $280 billion and almost 19% in the following year. Now profitable, AMZN stock features strong earnings and robust cash flow. It’s a name to own if you get it on a deep enough correction.