The past few weeks have brought increased volatility to the markets and many stocks have declined between 5%-10%. One of those stocks that have fallen fast is Amazon (NASDAQ:AMZN), the e-commerce and cloud giant. Year-to-date, Amazon stock is up about 20%.
However, the current sell-off, especially after the release of disappointing earnings results on July 25, has been so sharp that many investors are now wondering when Amazon shares may go back over $2000, a level it has reached three times since 2018.
I believe that the current weakness in Amazon shares will continue in the coming weeks. And this price pullback will take some time to run its course. Let us now take a loot at why Amazon stock is not likely to regain its $1 trillion market cap any time soon.
Amazon Stock’s Q2 Earnings Failed to Impress
When Amazon reported its Q2 earnings, the retail giant missed on the bottom line as it warned profits would disappoint in Q3, too. Amazon’s EPS in the quarter was $5.22, compared to the forecast EPS of $5.56.
Amazon beat analysts’ average revenue estimate by a small amount. Its Q2 revenue came at $63.4 billion. Wall Street was looking for $62.5 billion. In Q2 2018, Amazon had posted $52.9 billion in sales.
Amazon’s revenue comes from five main segments:
- Retail Products (about 65% of its revenues)
- Retail Third-Party Sellers (about 14% of its revenues)
- Amazon Web Services, or AWS (about 16% of its revenues)
- Subscriptions such as Amazon Prime (about 5% of its revenues)
- Other, such as credit card agreements (about 2% of its revenues)
During the quarter, Amazon’s U.S. sales increased by 17% to $35.8 billion. The group’s international sales grew by 9% to $16.2 billion.
Investors noted that the group’s renewed investments into the company are paying off as sales increased. However, this sales growth is coming at the expense of lower profit margins.
Since the release of the quarterly results, investors have been recalibrating their growth expectations for the rest of the year, as partly reflected by the sharp price-drop.
Will Amazon’s Revenue Growth Start to Pick up Soon?
These results revealed that the revenue growth of Amazon’s online store, third-party sellers, and subscriptions has been decelerating.
Furthermore, AWS, or Amazon’s cloud business, reported its slowest growth rate in several years. Its AWS revenue hit $8.4 billion. However, the consensus estimate was for $8.5 billion. In Q2 2018, the unit revenue had been $6.1 billion. Investors were especially concerned that the growth in AWS is not offsetting the top-line declines of other segments.
Over the past few years, revenue and operating profits of AWS have grown extremely quickly. However, its mouth-watering operating margins have also attracted serious competition from other tech giants, including Microsoft’s (NASDAQ:MSFT) Azure, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud, and Alibaba’s (NYSE:BABA) cloud operations.
Going forward, Amazon expects its investments to increase, another factor that will negatively affect its bottom line and potentially Amazon stock in the near future. The company is expected to invest heavily in its advertising business, Prime video, international growth, shipping, and logistics.
Although these investments will eventually propel Amazon to its next phase of growth, it might take several quarters for the owners of AMZN stock to see a substantial increase. In other words, investors may have to further curb their expectation of almost endless growth and eventual retail dominance.
As a result, when the company releases Q3 earnings in late October, analysts will be paying attention to the various growth metrics that Amazon reports. Management gave Q3 net sales guidance to be between $66-$70 billion. This guidance would mean a growth of between 17% and 24% compared with third-quarter 2018.
Amazon Stock’s Technical Charts Urge Caution
Amazon stock’s 52-week range has been $1,307 (Dec. 24, 2018) and $2,050.50 (Apr. 9, 2019). On July 27, AMZN shares closed at $2,000.81. Since then, the stock price has declined rapidly.
After the rapid increase of AMZN share price between early June and late July, Amazon’s momentum indicators, which are based on the speed at which prices move over a given period, had gone into overbought territory. Therefore, some profit-taking in late summer was to be expected.
However, with the fast decline to the current ~$1,800 level, Amazon stock’s short-term technical charts are now telling investors to exercise caution. In other words, while AMZN has dropped sharply over the past few weeks, it probably still has some way to go before a sustainable bottom can be reached.
In the coming weeks, I expect AMZN stock to trade in a range between $1,625 and $1,825. If AMZN stock can go and stay above the $1,825 level, it is likely to test $1,900 and above soon.
However, if Amazon stock falls below $1,725 and then below $1700, AMZN will likely drop to $1,625 or even lower rather quickly.
Amazon stock will need to stabilize and build a base again before it can deliver a long-term, sustained rally that would take the shares over $2,000.
The Bottom Line Amazon Stock
If you are wondering whether you should buy Amazon stock right now, the answer depends on your evaluation of Amazon’s fundamentals and on your investing time horizon.
If you already own AMZN stock, you might want to hold onto your shares. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss about 3%-5% below the current price point.
When Amazon next reports its Q3 results in October, investors will scrutinize the company’s fundamentals. If the results show that the company’s growth has slowed further, investors may decide that Amazon is now a maturing company. As a result, they may think that the current valuation of Amazon stock is excessive.
Nonetheless, it is important to remember that a mega-company with fundamentals as robust as Amazon’s could withstand several months of uncertainty. And, eventually, AMZN’s management will make decisions that will move the company forward.
Therefore, patient investors who continue to believe in AMZN may see any price dip towards or below the $1,700 level as an opportunity to go long AMZN stock and ride out its daily volatility.
In two to three years, I expect these investors to be rewarded handsomely. Eventually, fundamental catalysts will drive Amazon stock higher, and the stock price will rise above $2,000 again.
As of this writing, the author did not hold a position in any of the aforementioned securities.