With Its Eyes Set on $2 Trillion Market Cap, Buy Dips in Amazon Stock

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When 2020 finishes in a little over four months, Amazon (NASDAQ:AMZN) will likely have come close to or even reached $2 trillion in market value. AMZN stock, which currently hovers at $3,300, has a market capitalization (cap) of $1.6 billion.

Amazon (AMZN) logistics center in Szczecin, Poland.

Source: Mike Mareen / Shutterstock.com

On Aug. 19, Apple (NASDAQ:AAPL) became the first U.S. public company to eclipse $2 trillion in market cap. Only two years ago, on Aug. 2, 2018, Apple had become the first U.S. company to have a market cap of $1 trillion.

Amazon had followed Apple to wear the same crown in a matter of weeks on Sept. 4, 2018. The $2 trillion-mark will require AMZN stock to go over the $ 4,000-level slightly. Although that day may not necessarily come in September, I believe it will happen sooner than later. Here’s why.

Q2 Results and AMZN Stock

Amazon, the largest U.S. e-commerce retailer, reported Q2 earnings in late July and smashed through analysts’ expectations. CEO Jeff Bezos called it “another highly unusual quarter.”

 

Revenue increased 40% to $88.9 billion, compared with $63.4 billion in the second quarter of 2019. Net income was $5.2 billion, and earnings per share (EPS) were $10.30. A year ago, the respective numbers had been net income of $2.6 billion, and EPS of $5.22. 

Sales in North America grew 43% to $55.4 billion. Meanwhile, international sales were up 38% to $22.7 billion. The Street paid attention to the six segments that contribute to the revenue:

  • Online stores (about 51.6% of revenue)
  • Physical stores (4.2%)
  • Retail third-party sellers (20.4%)
  • AWS (12.2%)
  • Subscriptions such as Amazon Prime (6.8%)
  • Other, such as credit card agreements and advertising (4.8%)

The company highlighted that it had invested over $9 billion in capital projects during the quarter, including fulfillment, transportation, and AWS. That is an impressive amount of money.

Finally, management gave third-quarter revenue guidance in the range of $87.0 billion and $93.0 billion. Analysts were expecting $86 billion.

The results showed that Amazon is not only an e-commerce giant, but it is also a big cloud business, two drivers that will take the company over $2 trillion market cap.

Developments are happening daily in global IT infrastructure, and Amazon is likely to lead the change and growth worldwide. As a result, it is becoming quite hard to value AMZN stock with traditional measures and P/E and P/S ratios.

In their recent book, authors Natalie Berg and Miya Knights argue that Amazon will continue to revolutionize e-commerce. The stay-at-home economy has been affecting how we live, work, shop, and study. Amazon seems to be able to serve customers in most aspects of this ‘new lifestyle’ either through the products it delivers or the infrastructure that AWS cloud services provide. 

The Stellar Run-Up of AMZN Stock in 2020

AMZN stock price reflects the group’s success in serving consumers both stateside in many countries worldwide. The shares started the year at $1,875. Its 52-week range includes a low of $1,626.03 in mid-March and a recent high of $3,344.39 on July 13. 

So far in April, AMZN stock is up around 80%. In comparison, the Nasdaq composite is up about 25%. Yet that metric only tells part of the story in 2002. Since the 52-week low hit on March 16, it has more than doubled. Put another way, $1,000 invested in AMZN stock in early spring would now be worth $2,000.

Are you an investor who also pays attention to short-term technical charts? Then you may be interested to know AMZN stock is currently overbought. Yet a momentum stock can stay overbought for quite some time.

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. So short-term traders should proceed with caution.

If you already own AMZN shares, you might want to stay the course and hold onto your position. That said, if you are worried about further profit-taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3% to 5% below the current price point to protect the profits you’ve already made from Amazon stock.

If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., Oct. 16 expiry. Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.

The Bottom Line 

Fundamental catalysts will likely drive Amazon stock even higher in the quarters to come. From a business perspective, the COVID-19 pandemic has so far had far-reaching effects. E-commerce and technology companies, such as Amazon, have become the ones that millions, if not billions of people worldwide rely on every day.

We can only assume that the company will continue to serve customers for years to come while successfully adapting to business conditions changes. So it is safe to say that AMZN stock belongs to a long-term portfolio. However, investors should also remember that a stock’s price increase is never a straight line up.

Investors should be ready to embrace for more volatility in the coming weeks. Yet, those with a longer-term time horizon may consider buying into any potential weakness in AMZN stock in the coming weeks. They will likely participate in the company’s march to becoming a $2-trillion business.

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. She also publishes educational articles on long-term investing. 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/2020/08/2-trillion-market-cap-buy-dips-in-amzn-stock/.

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