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Amazon (AMZN): America's Golden Child Ripens

Daniel Laboe

FAANG, as an aggregate, has been underperforming the broader market over the past 52-weeks with only one stock illustrating positive returns. Over the past 12 months, Netflix NFLX shares lost 19.4%, Amazon AMZN is down 10.5%, Apple AAPL shares fell 7.7%, and Alphabet GOOGL is down 4.7%. Facebook FB, the one bright spot in FAANG, has been able to return shareholders 3.9% in the last 52-weeks.

Is this signaling a buying opportunity or a sign to get out while you still have your dignity?

The Golden Child

America’s sweetheart stock, Amazon, has given investors a wild ride over the last year. From AMZN’s all-time high of $2,050 in the beginning of September last year the stock dropped over 36% going into the new year. It has recovered quite a bit since Christmas Eve’s lows, rallying over 35% to $1,773. This is still 13.5% off its 52-week highs.

Amazon has come a long way from Bezo’s garage-based book store. It now operating not only the largest ecommerce business in the world, but also controls a majority share in the cloud computing market with its early penetration. Since Bezo’s originally took Amazon public in 1997, its stock price has proliferated over 100,000% because of Amazon’s innate ability to perpetually stay ahead of the curve.

AMZN has a buy rating across the board and is sporting a short interest below 1%, making it one of the least shorted equities in the market. Does this mean that AMZN is an unstoppable power that has no where to go but up, or is this a sign that this stock may have too much optimistic market sentiment and investors have traded it above and beyond its intrinsic value?

Amazon shares are trading at 57.8 times 12-month forward earnings. This is substantially higher than the S&P 500’s 17x, which means that AMZN has an extraordinary amount of growth priced into it. It might not take a big economic down side to see its valuations shrink.

Q2 Results

Amazon has fallen over 10% since its earnings release on the 25th of July but is still up 16% for the year. The company beat sales expectations but missed on EPS for the first time in 2 years, inducing shareholder concern.

Amazon’s cloud segment, AWS, also missed estimates, decelerating the growth of this segment quicker than expected. AWS is anticipated to be the primary growth driver moving forward. This larger than expected slowdown caused uneasy AMZN sentiment in the market.

Amazon has been struggling with short term costs due to its investment in one-day delivery domestically and internationally. Analysts are anticipating that Amazon’s high margin AWS cloud business will make up for the thinning margins in e-commerce. 70 to 80% of operating income is expected to be derived from AWS by the end of this year.

Prime Day was an enormous success and the single largest event in Amazon history with sales surpassing Black Friday and Cyber Monday combined. Expect the benefits of this event to be reaped in Q3.

I believe that these short-term margin cuts will not affect the long-term growth of the company, and as AMZN’s price falls, the buying opportunity ripens. The question is what price makes these shares a truly ripe buy? The price at which I would not hesitate to pull the trigger on AMZN is anything below $1,500.

Same Day Delivery Issues

Amazon is attempting to take its incredibly fast and efficient ecommerce offering to the next level with same-day and one-day delivery. This is something that would be considered unprecedented in the past and something that delivery services like FedEx FDX or UPS UPS would never have thought was possible.

Amazon cut ties with FedEx in early August and has not looked back with their own delivery services having grown leaps and bounds over the past 5 years. Since the end of 2013, Amazon has increased the number of fulfillment centers and internal distribution extensively to accommodate its shortened deliver services.

Same-day delivery options makes the choice between going to the store and ordering from your couch a much easier decision. The number of prime subscribers has spiked to over 100 million in the US according to WSJ article, almost one third of the total population in America.

Amazon’s expediated deliveries came at a price though. The cost shipping and fulfillment costs significantly increased pinching the firms operating margins. Long-term, the company hopes that this new service will drive topline growth back into acceleration and the scale will improve margins.

Take Away

Amazon is America’s favorite online retailer and ostensibly their favorite stock. I believe that its current price is a good reflection of its current value with the trade war instigating concerns over a looming economic slowdown.

AMZN remains a strong long-term investment with its diverse portfolio of market leading businesses. As a short-term investment, I may wait to see this stock tumble a little more before I feel comfortable putting a position on. The lower it goes the more attractive the buy, and I would not hesitate to buy if it crosses under the $1,500 market and continue to average down slowly if it continues to drop. Never put a huge position on a falling stock, instead hedge your bets with small positions as it falls. If you are going to catch a falling knife, make sure you do it with a glove.

 

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