The S&P 500, Dow Jones and Nasdaq have all gone on to make new all-time highs this month. But one notable mega-cap stock that hasn’t? Amazon (NASDAQ:AMZN). Surprisingly, AMZN stock is about 14% below its all-time highs.
Adding insult to injury, Amazon continues to lag its larger mega cap peers — Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) — as they push to new all-time highs, too. With the exception of Netflix (NASDAQ:NFLX), Amazon is the worst-performing component of the FAANG group over the past year.
Put simply, Amazon has been disappointing for investors. But the question is: why?
AMZN Disappointed and Underestimated
After beating on earnings estimates for seven straight quarters, Amazon has come up short in each of the last two. Management keeps telling investors that its push to one-day shipping will cost the company a significant sum. Guidance keeps coming up short as well. In July, it was a shortfall in profit. This quarter, it was revenue.
Management is telegraphing the situation to Wall Street and investors seem to only shrug, as if they think management is simply trying to set a low bar to hurdle. In other words, it’s like they are underestimating what management has to say.
For the bulls, it could certainly be worse. After all, the stock could be tanking on these results, particularly on the latest quarter. If this isn’t the ultimate vote in Bezos & Co., I don’t know what is. That said, some bulls are surely growing frustrated with the performance.
If they are lucky, the stock will continue to weather the one-day shipping spending storm until Amazon starts to beat estimates again. Not that AMZN stock has ever been one to have much of a tether to its valuation, but it’s hard to bid up a stock with an $870 billion market cap when it keeps coming up short of expectations.
Trading Amazon Stock
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Despite trading below all of its major moving averages and a shallow series of lower highs (blue line), the chart doesn’t scream “Sell! Sell! Sell!” But it doesn’t underscore a bullish theme either. I’d say it’s neutral to slightly bearish, but nothing to be overly concerned with.
However, in order for bulls to get truly fired up, AMZN stock needs to hurdle $1,825. That will put it over all of its major moving averages, as well as downtrend resistance. Until then, it can remain choppy. Below the October low at $1,685 and things could get ugly for Amazon.
The Bottom Line on Amazon
I often talk about the blend of technicals and fundamentals and how the two drive stock prices. At times, technicals can bail out a sub-par fundamental development. In other situations, a low valuation and solid dividend may buoy the stock at a time when the technicals would suggest avoiding the stock.
In the case of Amazon, neither the fundamentals nor the technicals are flashing serious warning signs. That said, neither are at their most impressive stages. Both are being accurately reflected in price action. That price action combined with forward expectations creates opportunity and risk.
Revenue growth forecasts for 2020 are roughly comparable to 2019, at 18.4% and 19.8%, respectively. However, there’s a huge disparity in earnings growth this year vs. next year. In 2019, forecasts call for just 2.5% earnings growth vs. estimates of 32% growth in 2020.
If we see a big acceleration in earnings next year, that’s an opportunity for Amazon stock bulls. However, if management continues to reign in expectations and come up short on earnings thanks to increasing expenses, that will weigh on the stock price even more next year.
As much as you hate to read that this is a wait-and-see situation, that’s exactly what AMZN stock is. Investors who believe it will meet or exceed earnings can begin accumulating shares. For those that don’t, they can pass.
For me, this is where the technicals come into play. I would rather wait for a pullback down to support between $1,675 and $1,700. If range support holds, it’s a low-risk buying opportunity because we can stop out with just a small loss.
If Amazon doesn’t fall that far and begins to rally instead, let’s see if it can clear resistance. There’s a lot of congestion between $1,775 and $1,825. Over the latter though and a run to $2,000 becomes possible.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AAPL.
