Amazon Stock Is Up 70% YTD - The Risks And Rewards

  • After a huge run-up in the year to date, Amazon's stock is up nearly 70%.
  • The company will be hard-pressed to match last year’s 20% growth rate
  • The market is no longer rewarding risk as it was; Amazon valuations looks stretched

A Look At The Price Movement In Amazon's Stock

Amazon Stock Is Up 70 percent Year to date The Risks And Rewards

Amazon (NASDAQ:AMZN) is an amazing company. It is the unquestioned leader in cloud, the second-largest digital movie network, and it is expanding its online store around the world. This has fueled an incredible run-up in the stock during 2015, a 68% advance that took the shares from below $300/share to above $500 in three giant post-earnings leaps. But speculators are starting to take money off the table. While most of the market fell modestly yesterday, Amazon fell $8/share.
AMZN stock chart
Amazon stock price graph by

What The Recent Rally Has Done To Amazon Stock Valuations

The reasons come down to fear replacing greed in market psychology. There seems no doubt that the market as a whole is heading for turbulence. The problems of China’s slowing economy, Europe’s refugee problem following the Syrian war, and a languishing oil price that could turn on a dime all spell risk through the end of the year. When risk approaches, many traders move strongly into cash.

This tends to fall first on speculative stocks, like Amazon. At its present price of $520, Amazon has a market cap of over $245 billion, which is three times revenues. For a technology company that’s still cheap, but the vast majority of Amazon’s revenues come from its online store, and merchants are usually valued at a discount to sales, not a premium.

Can Amazon Keep Up?

Amazon grew its sales by 19% from 2014 to 2015, and the year-over-year revenue growth for the June quarter came in at 20%. But as numbers grow they also grow harder to move. To achieve 20% growth for the full year, Amazon will need sales of $105.6 billion. So far this year it has reported $45 billion. That means it needs to generate $60 billion in sales over the next two quarters to achieve the market’s goals, and most likely achieve $36 billion in volume during the Christmas quarter.

Then there is the question of profit. Amazon seems almost immune to profit. It achieved its run this year while earning $35 million on $45 billion in sales. It’s practically a rounding error. Analysts expect it to lose money in the third quarter, meaning any year-end profit has to come entirely from Christmas.

But if your numbers are dependent on Christmas, the bears say, you’re a store, not a tech outfit. Oh, yeah, reply the bulls. By that argument, what about Apple (NASDAQ:AAPL)? Some 40% of its 2014 revenue came during the Christmas season and it’s still a tech company.

Why The Rally Means Risk

There’s another compelling reason why traders may dump Amazon this month, and that is portfolio readjustment.

Most investment strategies say you should diversity your holdings and adjust periodically. This means stocks that have run up get sold, and the profits reinvested in sectors that are lagging. Amazon’s big run may, in the hands of many investment managers, carry the seeds of its coming fall.

Amazon is not doing anything wrong. Some 80% of the professionals analyzing the stock right now are bullish, meaning they expect the company to keep moving forward. If you buy this dip, they expect you to profit over the next year. But if you have big profits in Amazon, sitting in your portfolio, chances are you’re also going to be tempted to sell into any rally.

It’s a ceiling Amazon is unlikely to break through until the global situation clears up.

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Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I'm an Amazon Prime member as well as a stockholder.
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