When Amazon (NASDAQ:AMZN) reported third-quarter earnings on Oct. 24 after market close, investors realized that the group’s push for faster delivery may be hurting AMZN stock’s profits. In after-hours trading, Amazon shares fell over 6%. The following day was a whirlwind one for AMZN shareholders as the stock opened the day at $1,697.55 a share, but then had a stellar comeback to close the week at $1,761.33.
Now, Wall Street is wondering if the Amazon share price may soon go over $2,000, a level it reached twice in 2018. I expect AMZN to stay rangebound in the near future. Thus, Amazon stock is not likely to regain its $1 trillion market capitalization any time soon. Here is why.
Amazon Stock’s Q3 Earnings
According to recent research by Blake Garner of Central Michigan University, “Amazon has managed to conquer markets globally to become the leading online retailer dominating e-commerce.”
Yet, when Amazon reported its Q3 earnings on Oct. 24, investor were not thrilled. Management said that the quarterly profit fell 26% year-over-year, missing analyst expectations. It also marked the first quarterly profit drop since 2017. Earnings per share also dropped 26% to $4.23 — and analysts had expected $4.62 a share.
The group’s quarterly net sales came at $70 billion, an increase of 24% year-over-year. Amazon’s sales comes from six main segments:
- Online stores
- Physical stores
- Third-party sellers
- Subscriptions such as Amazon Prime
- Amazon Web Services
- Other, such as credit card agreements and advertising
Within the past six months, management has started an ambitious attempt to cut delivery time to one day for Prime subscribers. This move has become a double-edged sword. Amazon customers have responded well and retail sales have increased across the board.
Yet the push is costing the company about $1.5 billion, or almost double the amount previously anticipated. Amazon has had to hire more workers at warehouses as well as expand its shipping and logistics network. The increased cost put considerable pressure on profit levels.
Growth May Slow
Amazon stock’s fourth-quarter operating income guidance also came in lower than what Wall Street had been expecting.
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 continue 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 the Amazon stock price. In other words, Amazon shareholders may have to curb their expectation of almost endless growth and eventual retail dominance.
Over the past few years, the revenue and operating profits of AWS have grown extremely quickly. In Q3, AWS’s revenue increased 35% year-over-year to $9 billion.
However, its mouth-watering operating margins have also attracted intense competition from Microsoft’s (NASDAQ:MSFT) Azure, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Cloud and as well as Alibaba’s (NYSE:BABA) cloud operations. For example, Microsoft has just won the lucrative 10-year, $10 billion Pentagon cloud contract, beating out Amazon. Investors can expect the battle in cloud services to get fiercer.
Amazon Stock Price Is a Battleground
Now that AMZN stock has reported Q3 earnings, the daily movement of its share price will mostly be based on macroeconomic news and the actions of big day traders.
In the next couple of weeks, I expect AMZN to be a battleground between two camps: long-term investors and day traders. The owners of Amazon stock are hopeful that the company will be able to accelerate its revenue growth, exploit new technologies and continue to disrupt the status quo.
Bulls further call attention to how quickly Amazon stock has tended to rebound from its declines. On the other hand, bears will be happy to point out that profits are decreasing, so the valuation of AMZN stock needs to be adjusted accordingly. Therefore, I expect AMZN stock to trade in a range, most likely between $1,825 and $1,675 a share.
Within this price range, I regard the $1,825 area as a crucial point in the battle between the bulls and the bears. If AMZN stock can go and stay above the $1,825 level, it is likely to test $1,900 soon.
Overall, from a short-term, technical point of view, I have become more bearish on AMZN stock recently, and I believe the shares could once again move towards $1,700 and below.
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.
So Should Investors Buy Amazon Stock Now?
The answer depends on an evaluation of Amazon’s fundamentals as well as the given investment time horizon. Q3 results have shown that long-term growth will likely come at the expense of short-term profits.
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.
It is important to remember that a mega-cap 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, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
