Watch for Dips, Because Amazon Stock Is a Buy Amid the Market Chaos

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Many investors are wondering whether now may be an opportune time to buy Amazon (NASDAQ:AMZN) stock. As I write, year-to-date, AMZN stock is more than 4%.

Watch for Dips, Because Amazon Stock Is a Buy Amid the Market Chaos

Source: Ken Wolter / Shutterstock.com

However, that number tells only half of the story in 2020. The price has fallen about 20% from mid-February highs. In other words, the recent selling wave has pushed Amazon shares, as well as many other stocks, close to bear market territory.

Understandably, such market corrections can feel scary both financially and emotionally. And the COVID-19 viral outbreak still poses health risks to millions of people not only in the U.S. but globally.

It is not an event to be adequately prepared for easily. Therefore today, I’d like to take a detailed look at Amazon stock. Interested readers may do further due diligence to see if the company should have a place in their long-term portfolios.

How Amazon Makes Money

Currently, the company’s revenue comes from six main segments:

  • Online stores (about 50% of its revenues)
  • Physical stores (about 6% of its revenues)
  • Retail Third-Party Sellers (about 20% of its revenues)
  • Amazon Web Services, or AWS (about 12% of its revenues)
  • Subscriptions such as Amazon Prime (about 7% of its revenues)
  • Other, such as credit card agreements and advertising (about 5% of its revenues)

On Jan. 30, Amazon reported robust Q4 results that easily beat analyst expectations. Revenue increased by 21% to $87.4 billion in the fourth quarter, compared with $72.4 billion in fourth-quarter 2018.

Net income increased to $3.3 billion in Q4, or $6.47 per diluted share, compared with net income of $3.0 billion, or $6.04 per diluted share, in Q4 2018.

Management was also upbeat about Q1, as it now expects to report revenue of $69-$73 billion.

The eCommerce giant’s Q1 earnings are next due in late April. If you do not currently hold Amazon shares, you may want to analyze the results to see if the company has been able to repeat the performance of Q4.

Amazon Stock Has Long-Term Catalysts

Market Capitalization: Following the quarterly results, the company’s market cap surged above $1 trillion. It is currently around $880 billion. Thus with such a mega market cap, it would be safe to assume that Amazon is unlikely to be held down by the market for too long.

The Street tends to regard large market cap companies as good and stable long-term investments. Even though we have a lot of uncertainty in the markets, seasoned investors know that sooner or later, markets put in a bottom. And the first names to recover tend to be strong and large companies, like Amazon.

AWS: Over the past few years, revenues and operating profits of AWS have grown extremely quickly. In Q4, AWS’s revenue came at $9.95 billion vs. expectations of $9.81 billion.

However, its mouth-watering operating margins have also attracted intense competition from Microsoft’s (NASDAQ:MSFTAzureAlphabet’s (NASDAQ:GOOG, NASDAQ:GOOGLGoogle Cloud and as well as Alibaba’s (NYSE:BABAcloud operations. Now Microsoft and Amazon are in a legal tussle over a recent lucrative 10-year, $10 billion Pentagon cloud contract. In the case of a favorable final outcome, Amazon would benefit significantly.

Although AWS brings in less than 15% of revenue, it contributes about 70% of profits. Going forward, investors can expect the battle in cloud services to get fiercer as Amazon works hard to expand its outreach.

Investments in Online and Physical Retail Deserve Your Attention

In recent quarters, the company has been heavily investing in expanding its eCommerce and physical retail operations as well as one-day delivery services for Prime members.

Seattle has recently become home to Amazon’s first full-size, cashierless grocery store, i.e. Amazon Go Grocery. The store has about 5,000 items, including fresh produce, meats and alcohol. In June 2017, the group had also acquired Whole Foods for $14 billion.

Investors are noting that Amazon’s renewed investments are paying off as sales have increased in Q4. Although these investments will eventually propel Amazon to its next phase of growth, it might take several quarters for the stock to see a substantial increase.

Following the Q4 results, management has said that they did not know how the coronavirus outbreak would affect Q1 earnings.

On the one hand, many consumers both in the U.S. and overseas are likely to be shopping more online. But on the other hand, many Amazon sellers have reported running low on inventories as disruptions hit supply chains globally.

The company is also finding it challenging to complete Prime Now and Amazon Fresh deliveries. Like other e-tailers, it has also been battling price gouging amid panic buying.

Therefore, until we have a trading update from management or see the next quarterly results, it may not be easy to fully appreciate how the current developments are affecting the company’s top and bottom lines.

What Could Derail Amazon Stock Further?

Over the past year, AMZN stock is about flat. On Feb. 11, the price hit a 52-week high of $2,185.95 and currently is hovering around $1,785.

If you pay attention to short-term technical charts, you may be interested to know that they urge investors to exercise caution.

Despite the recent declines over the past several weeks, Amazon stock, like the rest of the tech leaders, may not have yet found a bottom.

The current sell-off has different angles, and the fact that consumers and businesses are all facing the results of a global pandemic makes it difficult to assess all the risks properly.

Amazon shares have considerable technical support around $1,700. On March 12, as stocks plunged, the stock spent considerable time below 1,700. The following day, we witnessed the share price seesaw, closing the week back over this important technical level.

If that level does not hold in the coming days, then a further drop toward the low-$1,600’s would be likely. However, if we go below $1,700 again, I’d expect many long-term investors to come back to the stock.

In a scenario where tech shares suffer further falls, then we may have to look back about 18 months. Our readers may well remember that Amazon stock’s most recent longer-term up move began in January 2019, following the broader market declines in the last quarter of 2018. At the time, the shares had seen a low of $1307.

If AMZN stock can stay over $1,750 in the coming days, we may have a move toward first the $1,820 and then the $1,880 levels.

Overall, from a technical point of view, Amazon stock will need to stabilize and build a base again before it can deliver a sustained rally that would take the shares toward $2,000.

Meanwhile, traders will likely keep the shares in a wide range, between $1,620 and $1,880.

So Should You Buy AMZN Shares Now?

Price momentum of late has not been on Amazon’s side, and when markets wipe out months of gains in a matter of weeks, it may not feel easy to keep calm. However, if you liked Amazon stock in February for robust fundamental reasons, then you should be liking it even more now when the shares are on sale.

In the coming weeks, we are likely to witness further volatility in the stock market. Investors may need time to digest the continuous news flow regarding virus developments on the health and economy front. So I’d not advocate bottom picking. However, I’d regard any price dip in Amazon stock, especially toward $1,650 level as buying opportunity for long-term shareholders.

If you already own AMZN stock, you might want to hold your position. That said, if you are worried about more selling, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3-5% below the current price point, to protect your profits to-date.

Alternatively, if you are experienced in the options market, you may want to hedge your long stock position with a covered call or put spread that expires on May 15. That expiration date would also give you enough time to evaluate both the economic results of the current coronavirus as the group’s Q1 earnings.

The Bottom Line on Amazon Stock

As long term investors, it becomes easier to endure this kind of choppiness only when we know we are in a given stock for the right fundamental reasons.

On a final note, Amazon stock’s beta is about 1.5, which means it is more volatile than the market. Therefore, the shares will react fast when broader markets move in either direction. In general, a technology company like Amazon with a beta of 1.5 would have returned 150% of what the market returned in a given period in an up market. And the reverse also holds true when markets decline.

Therefore, if you own Amazon or other tech stocks, be ready for more stomach-churning trading days. Yet, 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, its management will make decisions that will move the company forward. Fundamental catalysts will likely drive Amazon stock higher in the quarters to come.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

Tezcan Gecgil, PhD, began contributing to InvestorPlace in 2018. She brings over 20 years of experience in the U.S. and U.K. and has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Publicly, she has contributed to investing.com and the U.K. website of The Motley Fool.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/amazon-stock-a-buy-market-chaos/.

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