Amazon (NASDAQ:AMZN) has been the perfect growth stock for over a decade. Management executed on plans perfectly in spite of tremendous criticism. For years, skeptics shorted Amazon stock simply based on the fact that the company spends too much money. But the point of being a growth company is to spend a lot of money. This is exactly what Amazon did under excellent leadership from CEO and founder Jeff Bezos.
To this day, this concept escapes many — even the experts on CNBC’s “Fast Money” show who just yesterday called AMZN stock risky based on valuation. I contend that it is as cheap as Apple (NASDAQ:AAPL).
Before you call me nuts, consider that both stocks sell at around 3.5 times sales. Compare that to Facebook (NASDAQ:FB), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) stocks which sell at 8.2, 8.4 and 5.8 times sales, respectively. Clearly AMZN runs with leaner margins on purpose so that it can maintain its incredible growth trajectory. Its revenues are up 115%, having more than doubled since 2015.
If you are still unconvinced, then consider this mind blowing fact. AMZN’s net income went from $596 million in 2015 to $10.1 billion in 2018. That’s up up more than 15 times. And the total cash flow from operations grew from $12 billion to $30.7 billion for the same years. Clearly this is a team that knows how to deliver on promises, yet the skeptics are still stuck in their old mindset.
So it is not surprising Amazon stock isn’t a star this year. Riskier stocks like Roku (NASDAQ:ROKU) who still lose money stole the show. By this I don’t mean that AMZN stock has been a loser, since it is up in line with the S&P 500. But it’s not outperforming like it usually does. Therein lies the opportunity.
AMZN stock comes under pressure a few times a year almost every year. These have been opportunity periods to reload long. What makes now a good time to try one is the coil effect. There’s so much fear in the overall markets that if we don’t break down, we will have a sharp snapback rally. And if that happens, then Amazon will have a catch-up spike from a base of around $1,700 per share.
AMZN Stock Is Cheap and Has Upside Potential
The upside potential of said rally could be a new all-time high. Granted, this won’t happen in one straight shot. There are plenty of resistance zones around $1,855 and $2,025 per share — just to name two. But with every resistance line comes an opportunity to overcome it. And if the bulls can do that, then they shoot higher above it.
Conversely, since we are in such a tenuous geopolitical environment, trading AMZN stock requires tight stops. This will depend on investor time frame and risk tolerance. Technically, the first area that could be trouble is at $1,720 per share. The next two are just $40 and $120 lower, respectively. For those who believe in the stock for the long term, the overall bullish thesis on Amazon stock has not changed. If markets are higher down the line, then so is AMZN.
The company earned the benefit of the doubt so this is not a fad. Management has proven over and again that they are strong leaders. That’s how Amazon got to dominate the cloud and disrupt dozens of industries. And I bet that it has more such stories already lined up in new verticals. Its mode of operation is to try many things and fail at most. But of those, the ones that stick are home runs.
And that is why a price-to-earnings ratio of 72 for AMZN stock is not a deal-breaker. As noted earlier, it keeps growing the top line to keep up with spending. Plus, Amazon also showed us that it can dial back the spending whenever it wants.
I am bullish on Amazon stock but not reckless. This is not the time to take huge positions with extreme conviction because we are still in headline mode. Politicians are wreaking havoc on the equity markets. Then add to that the fact central banks have gone bonkers with the free money. This is all to say that it’s risky out there, so it is prudent to make small bets and employ tight stops.
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 for free here.
