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3 Reason to Buy the Dip in Amazon Stock

AMZN stock is a long-term winner worth buying amid recent weakness

Amazon (NASDAQ:AMZN) stock — alongside the rest of the tech sector — has suddenly and sharply plunged in September, with shares falling nearly 20% in about three weeks.

amazon sign
Source: Eric Broder Van Dyke / Shutterstock.com

To be sure, this rally was long overdue. AMZN stock was red-hot for a long time. Coming into September, the stock was up 90% year-to-date.

On the heels of such a large rally, Amazon stock was subject to profit-taking dynamics on any sort of weakness in the growth narrative. It’s no surprise that, amid broader weakness in the tech sector, Amazon stock is dropping.

But this sell-off has now come too far, and below $3,000, AMZN stock looks like a compelling buy on the dip.

Here’s three big reasons why.

We Are All Still Shopping Online

There are some concerns out there that as the world normalizes — and physical retail shops re-open — we will stop shopping online so much and start shopping offline more.

But that is yet to happen.

According to multiple data sources, we are all still shopping online.

JP Morgan’s credit card data shows that online retail spending trends have not faded at all since May. If anything, they’ve accelerated, as consumer confidence has rebounded and discretionary spending has recovered. The most recent data from JPM is that “card not present” spending rose 12.3% year-over-year in the second week of September — among one of the highest weekly growth rates JPM has reported all year long.

Similarly, web traffic data from SimilarWeb shows that Amazon.com web traffic has remained very strong throughout the summer. Google Trends data shows that search interest related to “Amazon.com” is still up huge year-over-year. AppAnnie data shows that downloads of the Amazon Shopping app have remained relatively steady over the past three months.

All in all, the takeaway is abundantly clear. Yes, the world is going back to normal, but it’s a “new normal”, and in this new normal, we shop online a lot more than we used to.

Of course, that’s great news for Amazon — the leader in global e-commerce who is only strengthening that lead with new delivery hubs, unique e-bike delivery methods and more product assortments like luxury goods.

So long as the online shopping frenzy continues and Amazon grows its value prop — both of which will remain true for the foreseeable future — AMZN stock will be supported by very strong fundamentals in the e-commerce business.

Public Cloud Spending is at All Time Highs

Amid the Covid-19 pandemic, every enterprise in the world pivoted their workflows and data to the cloud, causing public cloud spending to soar 25% year-over-year in the second quarter of 2020 to all time highs.

This is just the beginning of public cloud spending surge.

When employees were forced to work remotely in April, May and June, most businesses realized that their employees didn’t lose any productivity when they worked from home. Actually, many businesses discovered that their employees are more productive when working at home, since they are more comfortable and there are fewer distractions.

Sure, a 100% work-from-home environment has huge social and emotional costs. Plus, it’s nice to have a face-to-face meeting every once in a while. But the productivity gains of remote work cannot be ignored, nor can the potential savings from businesses being able to potentially downsize and reduce rent costs.

Thus, the future of work is hybrid work. You still go to the office. But only two to three days a week. The other days you work from home. Some employees may even be permanent work-from-home.

Those who go in are on a rotating schedule so that businesses can appropriately downsize and save money without making space too tight. Meetings become a 50/50 mix of Zoom (NASDAQ:ZM) calls and in-person meetings.

That’s the future.

And in that future, public cloud infrastructure become ubiquitous across all enterprises.

In the public cloud space, Amazon Web Services is king, and has been king ever since the space was invented back in the mid-2000s.

To that end, it is exceptionally likely that Amazon Web Services sustains huge growth for a longer — a reality which should support continued strength in AMZN stock.

Amazon Stock is Undervalued

The best reason to buy AMZN stock on the dip is that shares are now undervalued.

My big picture thinking on Amazon is pretty simple.

Amazon.com continues to dominate the global e-commerce market, which continues to comprise a bigger and bigger slice of the retail sales pie. Amazon Web Services continues to dominate the global public cloud market, which benefits from favorable hybrid work tailwinds over the next several years. The company’s other businesses — digital advertising, offline retail, and smart home — grow at healthy paces into 2030. Profit margins rise as the low-margin e-commerce business becomes a smaller and smaller revenue driver for the company.

In numbers, that big picture thinking translates into somewhere around $250 in earnings per share by 2030, according to my modeling.

Based on a 25-times forward earnings multiple, that implies a 2029 price target for AMZN stock of $6,250. Discounted back by 8.5% per year, that implies a 2020 price target for AMZN stock of ~$3,000.

Thus, two weeks ago, Amazon stock was overvalued. Today, it’s undervalued. And that’s pretty much all that’s changed.

Bottom Line on AMZN Stock

Don’t overthink this one. Amazon is the world’s most innovative and arguably dominant company, with market-leading positions in multiple huge growth industries, like e-commerce and cloud.

Nothing about those fundamentals has changed over the past few weeks.

The AMZN stock price is just lower.

Long-term investors would be wise to ignore the noise and load up on this dip.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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Article printed from InvestorPlace Media, https://investorplace.com/2020/09/3-reason-to-buy-the-dip-in-amzn-stock/.

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