The stock market in general continues to rebound from the novel coronavirus, but Amazon (NASDAQ:AMZN) already crossed that hurdle. Thanks to social distancing, the eCommerce powerhouse has even a greater edge over traditional “brick and mortar” businesses. And that’s been a boom for Amazon stock.
Not only have shares bounced back from their coronavirus sell-off losses. The stock now trades around $2400 per share. That’s well ahead of where it was before the pandemic first hit America. Yet, can the company’s shares continue to go higher?
In most situations, I would give a resounding “no,” but this is Amazon we’re talking about. You know, the company you don’t want to bet against. So, selling the stock short may be out of the question. With rock-bottom interest rates encouraging investors to choose stocks over bonds and other financial instruments, that money needs to go somewhere.
And with many sectors facing big trouble from the crisis, companies that are only marginally affected by the outbreak are where investors want to put their money.
Does that mean buying shares today means further moves higher? Yes and no. Amazon may be a great “flight-to-quality” play in these uncertain times. But that doesn’t mean it’s wise to chase this stock while it’s “too hot to touch.” Let’s dive in, and see why it may be best to wait for a pullback.
Amazon Stock and the Stay-at-Home Economy
As InvestorPlace’s Luke Lango put it in a recent article, Amazon shares give you exposure to multiple aspects of our current stay-at-home economy. In other words, not just consumer-related ones such as eCommerce and streaming. I’m talking about their exposure to potential business-to-business coronavirus tailwinds.
Lest us not forget Amazon Web Services (AWS). As our own Louis Navellier wrote on April 14, AWS is a difference-maker for Amazon stock. Not only because it’s their main profit center. But also the impact of millions of Americans working from home. A temporarily-remote workforce could be boosting demand for cloud computing.
Yet, it wouldn’t be accurate to say today’s crisis is the only catalyst for Amazon stock. The stay-at-home economy is just a temporary windfall. A big long-term trend, digitalization, remains in motion. And with the company on the winning side of these changes, expect them to continue gaining dominance across multiple industries.
Sounds like a great reason to buy, right? That depends. Everybody knows they’re crushing it right now. And that’s why shares have rallied more than 30% in the past month. With this quick rise, it may not be best to chase this dynamo while Wall Street enthusiasm for the stock is red hot.
Watch out for Earnings
At first glance, it seems foolish to chase Amazon stock at today’s rich valuation. Shares trade at a forward price-to-earnings (P/E) ratio of 84.6. Even with estimated earnings growth of around 38.7% between 2020 and 2021.
But a by-the-book valuation approach may not be relevant when talking about Amazon. Simply put, they aren’t ready to become a cash cow just yet. Instead, they continue to aggressively invest to drive organic growth. Once the time comes for the company to take its foot off the gas pedal, expect earnings to skyrocket. In other words, there’s more to current earnings than meets the eye.
One caveat, though: this argument may justify the long-term case for Amazon. But, how about the near-term? The company next announces results on April 30. Currently priced for perfection, shares could take a dip if results and guidance don’t live up to expectations. Keep this in mind in the days leading up to earnings.
What’s the Play? Wait for a Pullback
Amazon’s upward trajectory remains in motion. Not just because coronavirus is more tailwind than headwind for the company. But also, because the company is on the winning side of the digitalization trend.
Yet, even with valuation less of a concern than with other story stocks, I wouldn’t dive in as shares go parabolic.
So, what’s the play? Wait for a pullback before buying Amazon stock. If shares take a breather, you could find a fantastic entry point for a long-term position.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
