- Amazon stock price is down almost 7% over the last one month. Will the bleeding stop?.
- The company has strong competitive advantages and robust growth rates which should protect it against a steep decline.
- The sentiment is stating that a rally is close. However, watch the NASDAQ 100 as this could lead tech stocks down in the near term.
With the Nasdaq Composite (INDX:COMPX) up almost 275 points over the last two weeks and the S&P 500 (INDX:SPAL) up almost 95 points (also 4.64%), it is pretty certain the equity markets in the US have printed an intermediate cycle low. Intermediate cycles in the stock market run about 30 weeks and almost always, the lions share of the gains takes place in the first third of the cycle. Despite the powerful thrust we have had out of the lows on the 4th of November, I actually think there is more room left in this rally and I would play the rest of the rally by going long Amazon.com (NASDAQ:AMZN). I recently outlined my long case for Amazon here, but with its recent earnings miss and a pre-election war of words between Trump and Bezos, Amazon stock remains down 7%+ over the past month. For now, Amazon stock still remains a strong buy for the following reasons.
Many believe Trump's grievance is warranted. Jeff Bezos has become one of the richest person on the planet by basically setting up his company in a way that it reports no net income every year.This enables the company to dodge enormous amounts of tax that its competitors pay. Nevertheless, all the while Amazon's share price has rocketed over the past few years and Bezos has been the main benefactor. However, all of a sudden, Bezos has offered an olive branch to Trump and publicly wished him well in his presidency. Talk about doing a 180 and Trump may take it as a sign of weakness. However, the most likely scenario is that nothing will come of this (proper tax audit that is) as the spat will just go down as pre-election rhetoric.
Amazon Has Strong Competitive Advantages Which Should Protect It Against Meaningful Downside Risk
First of all, when analyzing any investment, my first port of call is always to see if the stock has strong competitive advantages. Although, Amazon doesn't pay a dividend, it definitely has huge assets within its arsenal that protect the stock from a huge sell-off to the downside. These advantages include but are not limited to the following.
Why Is This Important
|Low Cost operations||In terms of scale (Although Amazon has intentions of opening up brick and mortar stores for groceries), fulfillment centers and online ordering (Amazon's model) is generally accepted as a cheaper alternative to scaling brick & mortar stores. The "fitting out" of a fulfillment center costs much less than a Super-center from Walmart (NYSE:WMT) for example. This enables Amazon scale its operations at a much faster rate than its competitors.|
|Network Effect||The low prices translate into a network effect which attracts buyers, third party sellers and large merchants on mass. The synergy between these three different groups of people results in a huge array of products being available on the platform for sale. Investors should note that all groups are increasing meaningfully in numbers at present. Third party sellers are a huge cash cow for Amazon due to the margins involved. This "network effect" will only intensify in years to come.|
|Amazon Prime||Amazon's premium service is another huge competitive advantage the company has. Why? Because Amazon is constantly adding more value to the service by adding more products (either at a discounted price or completely free). Jeff Bezos's vision here is to add massive value here in order to up-sell normal Amazon users into Prime. Again growth rates are re-accelerating with Prime having just launched in China recently.|
|Amazon Web Services||Amazon has the biggest cloud computing service in the world by far and the margins in this segment are really impressive. In fact, AWS makes up almost 50% of total revenues generated by public cloud companies leaving the likes of Microsoft (NASDAQ:MSFT) and International Business Machines (NYSE:IBM) in its wake. Don't read much into the recent cut in prices as this segment is expected to grow by at least 30%+ a year going forward with AWS leading the way.|
NASDAQ & S&P 500 Remain Strong But The NASDAQ 100 Remains A Concern
In terms of technicals, both the S&P 500 and the NASDAQ have had a very strong start to this intermediate cycle. One thing to watch though in the NASDAQ 100 (INDX:NDX) which has been underperforming the general NASDAQ for the past few weeks. If the NASDAQ 100 breaks its November 4th lows, it will be interesting to see if the general NASDAQ follows it down.
Sentiment Is Ultra Bearish In Amazon At Present - Buying Opportunity
In saying this, sentiment in Amazon is ultra bearish at the moment which usually means a good buying opportunity. In fact, if we look at the sentiment chart below, we can see that every time sentiment was this bearish, Amazon eventually ended up rallying off its lows.
Source : Sentimentrader.com
Donald Trump's comments about Amazon and other big US tech companies have definitely hurt their share prices recently. The question is whether this "uncertainty" will blow over or will the NASDAQ break down. One thing I know for sure. The biggest potential gains come when the market is fearful. Therefore, by adopting strict risk management and by using a hard stop loss, one could attempt getting long on Amazon here.
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