Is Amazon Stock Still a Growth Name?
30 Jun 2019
Many investors are wondering whether Amazon stock may soon go over $2000, a level it reached twice in 2018.
I expect AMZN to stay rangebound in the near future. Thus, Amazon stock is not likely to regain its $1 trillion market cap any time soon, unless its next earnings report, slated to be unveiled on July 25, is very strong.
As Amazon Matures, Its Growth May Slow
When Amazon reported its Q1 earnings on Apr. 25, the retail giant beat analysts’ average revenue estimate by a small amount. Its U.S. sales increased by 17% to $35.8 billion, while its international sales grew by 9% to $16.2 billion.
Amazon’s revenue comes from five main segments:
Retail Products (about 64% of its revenues)
Retail Third-Party Sellers (about 16% of its revenues)
Amazon Web Services, or AWS (about 13% of its revenues)
Subscriptions such as Amazon Prime (about 5% of its revenues)
Other, such as credit card agreements (about 2% of its revenues)
The quarterly results revealed that the revenue growth of Amazon’s online store, third-party sellers, and subscriptions has been decelerating Although AWS’ sales rose 41% to $7.7 billion, analysts noted that the segment is not growing as quickly as expected, and that it’s not offsetting the top-line declines of other segments.
Over the past few years, the revenue and operating profits of AWS have grown extremely quickly. However, its mouth-watering operating margins have also attracted intense competition from Microsoft’s (NASDAQ: MSFT ) Azure , Alphabet’s (NASDAQ: GOOG , NASDAQ: GOOGL ) Google Cloud , and Alibaba’s (NYSE: BABA ) cloud operations .
Going forward, Amazon expects its investments to increase, another factor that will negatively affect its bottom line and potentially Amazon stock in the near future. The company is expected to invest heavily in its advertising business, Prime video, international growth, shipping, and logistics.
Although these investments will eventually propel Amazon to its next phase of growth, it might take several quarters for the owners of AMZN stock to see a substantial increase in Amazon stock price. In other words, the owners of Amazon stock may have to curb their expectation of almost endless growth and eventual retail dominance.
As a result, when the company reports its Q2 earnings in late July, analysts will be paying attention to the various growth metrics that Amazon reports. Management gave Q2 revenue guidance of $59.5 billion to $63.5 billion. On average, Wall Street analysts expect the company’s top line to come in at $61 billion.
Amazon Stock Is a Battleground
Until AMZN reports its earnings on July 25, the movement of Amazon stock will mostly be based on macroeconomic news and the actions of big day traders.
In other words, in the next couple of weeks, I expect AMZN to be a battleground between two camps: long-term investors and day traders. The owners of Amazon stock are hopeful that the company will be able to accelerate its revenue growth, exploit new technologies, and continue to disrupt the status quo.
Bulls further call attention to how quickly Amazon stock has tended to rebound from its declines.
On the other hand, bears will be happy to point out that the revenue growth of many of Amazon’s large business units is slowing, so the valuation of AMZN stock needs to be adjusted accordingly.
AMZN stock is likely to be volatile around Amazon Prime Day , the company’s widely-anticipated sales event that will begin at 12 a.m. PDT on Monday, July 15 and last for two days.
Until Amazon’s next earnings report, I expect AMZN stock to trade in a range, between $1900 and $1750.
Short-Term Technical Analysis
Within this price range, I regard the $1825 area as a crucial point in the battle between the bulls and the bears.
If Amazon stock falls below $1825 and then below $1800, AMZN will drop to $1750 or even lower rather quickly.
On the other hand, if AMZN stock can stay above the $1825 level, it is likely to test $1900 and above soon.
After the rapid increase of Amazon stock price in June, Amazon’s momentum indicators, which are based on the speed at which prices move over a given period, went into overbought territory. But this week, short-term profit-taking has kicked in, and the bullish momentum of Amazon stock has started to fade.
Overall, from a short-term, technical chart point of view, I have become more bearish on AMZN stock recently, and I believe the shares could move towards the low $1700s.
Amazon stock will need to stabilize and build a base again before it can deliver a long-term, sustained rally that would take the shares over $2000.
So Should You Buy Amazon Stock Now?
The answer depends on your evaluation of Amazon’s fundamentals and on your time horizon.
If you already own AMZN stock, you might want to hold onto your shares. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss about 3%-5% below the current price point.
When Amazon reports its Q2 results, investors will scrutinize the company’s fundamentals. If the results show that the company’s growth has slowed, investors may decide that Amazon is now a maturing company. As a result, they may think that the current valuation of Amazon stock is excessive.
Nonetheless, it is important to remember that a mega company with fundamentals as robust as Amazon’s could withstand several months of uncertainty. And, eventually, AMZN’s management will make decisions that will move the company forward.
Therefore, patient investors who continue to believe in AMZN may see any price dip towards or below the $1700 level as an opportunity to go long AMZN stock and ride out its daily volatility.
In two to three years, I expect these investors to be rewarded handsomely. Eventually, fundamental catalysts will drive Amazon stock higher, and the stock price will rise above $2000 again.
As of this writing, the author did not hold a position in any of the aforementioned securities.
By Tezcan Gecgil