Amazon Stock Is an Unpopular and Certain Buy

  • Recent mixed earnings from Amazon (AMZN) saw investors focus on the negative.
  • Amazon Web Services (AWS) continues to deliver growth and AMZN stock sets up as a buy.
  • Investors should buy Amazon shares or a vertical to initiate a long position.
Closeup of the Amazon (AMZN) logo at Amazon campus in Palo Alto, California. The Palo Alto location hosts A9 Search, Amazon Web Services, and Amazon Game Studios teams.
Source: Tada Images / Shutterstock.com

It remains an undeniable part of our daily lives. But a long-trusted strategy of buying what you know hasn’t delivered for Amazon (NASDAQ:AMZN) investors. Shares of AMZN stock are down 34% this year and handily outpacing the Nasdaq’s own brutal and bearish decline of 24%.

Rampant inflation, at-risk consumers, supply chain disruptions, unpleasant and concerning rate hikes. Welcome to a less-than-pleasant operating environment for risk assets of all sizes and credos. And confirmation of those bad actors adversely impacting Amazon were in plain sight recently.

On April 28 the tech giant delivered mixed quarterly results. But in a risk-off environment, the report played directly into the hands of AMZN stock bears and terrified bulls as shares tumbled 14% in the report’s immediate aftermath.

Today though and after reviewing what else is happening off and on the price chart in AMZN stock, investors might remember another tried and true investment approach, and buy Amazon shares when others are fearfully selling.

AMZN Amazon $2,177.18

AMZN Stock Fails to Deliver

Amazon’s quarterly confessional certainly had the headline-ready looks of an unwanted package that could be anathema to AMZN stock buyers. And in today’s risk-off environment, it played out that way rather easily.

Headlining, the tech giant announced its slowest growth rates since the 2001 dot-com bust as revenues increased by just 7% versus the year-ago period’s sales jump of 44%.

Sales did manage to narrowly beat forecasts, but worryingly Amazon’s top-line marked the second straight quarter of single-digit sales growth. AMZN stock investors were further spooked by Amazon’s downwardly-revised and below views revenue guidance which sets the stage for an even weaker second quarter on sales growth of 3% to 7%.

There were other concerning line items assisting Amazon shares to their largest single day decline in six years too. AMZN stock delivered a surprise net loss of $3.8 billion after it booked a $7.6 billion loss on its electric vehicle Rivian (NASDAQ:RIVN) investment.

Also, despite raising fees for some of its e-commerce sellers, as well as hiking dues across the board for Prime members, Amazon saw shrinking, razor thin operating margins of just 3.2% in Q1 compared to last year’s increase of 8.2%.

But while some furrowed eyebrows of concern can’t be entirely faulted, the report wasn’t nearly as toxic as the reaction by investors suggests.

Amazon Is a Prime Buy

Amazon (AMZN) testing key band of price, trend and Fibonacci support
Click to Enlarge
Source: Charts by TradingView

This past month’s extreme de-risking by investors allowed the good or even exceptionally solid aspects of AMZN stock’s report to be ignored and further dismissed with shares down another 12% into Tuesday’s session.

For one, and bullishly, advertising revenues grew by 23% from 2021’s first quarter. To be fair, sales did narrowly miss forecasts of $8.17 billion by 3.45%. Still, that’s a significant improvement. Moreover, it’s larger than Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube ad sales and without the privacy-related ad challenges facing the video app.

Amazon’s AWS cloud business also delivered strong operating results while remaining atop that market’s food chain and competitors Microsoft (NASDAQ:MSFT) and Alphabet’s Google.

Burly revenue growth of 36.5% narrowly topped Street forecasts on sales of $18.44 billion, produced income of $6.5 billion on year-over-year growth of 57% and highly-attractive double-digit and growing gross margins north of 35%.

What’s also appealing about AMZN stock right now is the opportunity to buy shares where growth is intersecting value. Today’s investors able to buy shares alongside the company’s recently authorized $10 billion buyback program and in front of an announced 20-for-1 stock split this summer.

Technically, Amazon is also in an attractive oversold testing position of its February 2020 pre-Covid all-time-high, as well as tight trendline and layered Fibonacci support dating back to 2016. Yup, buying when everyone else is fearful has rarely looked so good.

Buying AMZN Stock

Last month I discussed AMZN as a buy, but warned a much larger bear market could be in the offing if shares broke $2,925. It proved painfully accurate, though a proffered out-of-the-money vertical and adherence to the price chart vastly minimized exposure to the ensuing fallout.

Today, nearly 30% cheaper, with Amazon’s market capitalization barely hanging onto its elite $1 trillion club membership and given the well-supported pullback into technical support, buying shares makes more sense as part of a longer-term campaign.

But given the extreme risk-off trading environment, a bull call spread remains a decent substitute for buying AMZN stock due to its leverage, reduced premium risk and ironclad protection. One favored combination is the June $2300/$2500 call vertical.

Priced for around $55 per spread, the combination caps downside risk at less around 2.5% of AMZN stock and can expand to $200 in price at expiration if shares rally by about 14.50% and above the sold $2500 call strike.

Bottomline, a rally of that size may sound like an impossible feat amid the bearish chatter hanging over Wall Street right now. But the last time I checked, buying smartly while everyone else is fearful doesn’t come with an inviting RSVP, otherwise we wouldn’t be having this conversation.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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