Is This A Sign That Amazon Stock Has Peaked?

Is This A Sign That Amazon Stock Has Peaked?

AMZN rallied in the second quarter, but at least one indicator suggests that the party may be over. The Amazon Maven takes a closer look.

Amazon stock (AMZN) - Get Report has awakened from its late 2020 and early 2021 nap. From mid-May to mid-July, share price increased 18%, easily beating the S&P 500’s 6% climb during the same period. But while some may have welcomed positive momentum at last, others saw reasons to worry.

MarketWatch has recently reported on a technical indicator showing that Amazon, among other stocks (and even the stock market at large), might be overbought. The Amazon Maven looks at the possibility that a correction could be imminent.

Figure 1: Amazon logo. Filmelier

(Read more from the Amazon Maven: Why Cathie Wood Has Gone Sour On Amazon Stock)

The cautious view

The key technical metric used to justify caution in this case is the RSI – the relative strength index that measures the magnitude of recent price changes in a stock. Mott Capital Management points out that Amazon’s RSI, while not the highest among Big Tech names, stretched to nearly 78 on July 8, and settled lower at a still rich 70 on Wednesday. See chart below.

What has caught my attention is that, in the case of the Nasdaq, a high RSI has historically coincided with a short-term correction. The tech-rich index saw its metric approach or even surpass 80 a few times in the past couple of years, and here is what happened in some of the most recent cases:

September 2020 : 15% decline in a matter of a few days;

15% decline in a matter of a few days; January 2020: 27% dip through the bottom of the COVID-19 crisis in March 2020;

27% dip through the bottom of the COVID-19 crisis in March 2020; April 2019: 12% correction by late May 2019.

In other words: every time that the Nasdaq corrected more than 10% between 2019 and 2020, its RSI flirted with a reading of 80 a few days ahead – as did AMZN’s within the last week or two.

Figure 2: AMZN’s relative strength index (RSI). TradingView

Sell AMZN?

Fears of a stock being overbought makes sense to me. When a stock rises substantially and too fast, there is the risk that improved sentiment may have been overdone, and that a pullback in share price to more reasonable levels is reasonable and imminent.

That said, notice how these correction-and-rebound cycles have historically happened very quickly. The Nasdaq dipped in early September 2020 but made all-time highs again only three months later. In April 2019, the return to the peak happened in a matter of only 10 weeks.

Also worth noting, a high RSI has not always led to a correction. In early 2017, the metric reached peaks not seen since then not once, but twice. Yet, the Nasdaq never pulled back more than 5% during that entire year. Also, investors that sold stocks at a high RSI risked missing the ideal re-entry point, passing up on future gains.

Therefore, the Amazon Maven would warn longer-term investors against trying to time exits and entries. Sure, a correction in Amazon stock could materialize in the near term. But for the sake of growing capital patiently over time, investors are probably better off enduring the short-term bumps and focusing on long-term performance.

(Read more from the Amazon Maven: This Is A Top Reason To Sell Amazon Stock)

Twitter speaks

Amazon stock has rallied in the past couple of months, and some fear that the party might be over. What do you think happens to share price in the next few weeks?

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Better Buy: Amazon vs. Shopify

Amazon (NASDAQ:AMZN) and Shopify (NYSE:SHOP) play different roles in e-commerce. Amazon has become the world’s single largest e-tailer, while Shopify has built its business by enabling smaller players to sell their wares online – more than 1.7 million of them at last count. And although both of these growth tech companies will probably produce sizeable stock gains for years to come, one offers greater potential for higher returns.

The businesses compared

Amazon is an e-commerce pioneer, and more than 25 years after its founding, it continues to produce double-digit percentage revenue growth annually. It’s steadily expanding the scope of its offerings, too, with its move into the pharmacy segment serving as the latest example. Also, with its acquisition of Whole Foods and the more recent development of its Amazon-branded brick-and-mortar stores, it has a significant real-world retail presence.

Just as important, it spearheaded the creation of the cloud computing industry with Amazon Web Services (AWS). It has used the highly profitable AWS to balance out the razor-thin profit margins in retailing, as well as to subsidize competitive e-commerce initiatives such as its switch from two-day to one-day shipping for Prime purchases in 2019. With a market cap of over $1.8 trillion, Amazon is now one of the world’s largest publicly traded companies.

By contrast, Shopify provides e-commerce platforms and infrastructure for other retailers. It started as a software company and outpaced most of its rivals by making it easy to set up online stores and offering reasonable pricing. However, this functionality did not make Shopify dominant – it lags WordPress app WooCommerce in market share, according to Oberlo.

Nonetheless, it has widened its competitive moat by developing the Shopify Fulfillment Network (SFN). The SFN will pack and ship orders from clients to their customers, and the company is continuing to add fulfillment centers across the country. The SFN gives it a key competitive advantage, as most of its peers merely provide software. Currently, Shopify has a $180 billion market cap.

How each stacks up financially

In the first quarter of 2021 alone, Amazon logged $109 billion in net sales, a 44% increase from year-ago levels. Net income rose 220% to $8.1 billion as its operating expenses grew more slowly than revenue, Additionally, the company earned $1.7 billion in income from non-core sources, primarily from growth in its equity investments.

Those increases were not unusual for the company. In fiscal 2020, net sales surged by 38%, while net income rose 84%, including the gains from its equity investments.

Impressive as those growth statistics were, Shopify’s were better. It reported first-quarter revenue of $989 million, a 144% increase from 2020’s first quarter. However, nearly all its net income came from $1.25 billion in unrealized gains. Without these unrealized gains, it would have only earned about $8 million. Still, that was a substantial improvement over Q1 2020, when it lost $31 million by that metric.

Additionally, Shopify’s Q1 revenue increase was an acceleration from its 2020 performance, when revenue surged by 86%. Lower growth in operating expenses helped it deliver a $320 million profit after 2019’s $125 million loss.

Neither of these companies has offered guidance for the current year. And only Amazon was willing to provide an outlook for Q2, saying that it expected revenue to rise by between 24% and 30% year over year.

Since the beginning of 2020, Amazon’s stock price has approximately doubled, while Shopify’s faster growth off of a smaller base has helped send its shares upward by an even more impressive 265%.

At this point, though, new investors will have to pay a real premium for that faster growth. Shopify now trades at 53 times sales, well over Amazon’s price-to-sales (P/S) ratio of 4.

From a price-to-earnings perspective, the difference appears to narrow significantly – Amazon is trading at a P/E of about 70 times earnings versus Shopify’s P/E of around 114. Still, since almost all of Shopify’s profit came from “other income,” its P/E ratio measured solely against the earnings of the core business would exceed 10,000.

Amazon or Shopify?

Both companies should continue to prosper. Nonetheless, I would choose to invest in Amazon stock at this time. Yes, Shopify is delivering faster revenue growth. But its stock is around 13 times as expensive from a price-to-sales perspective, and its revenue only grew at about double Amazon’s rate in 2020. While Shopify should keep growing faster than Amazon, its stock has become too expensive to justify its premium.

Amazon Stock Guide

Amazon: the basics

Amazon trades on the NASDAQ stock exchange under the stock ticker NASDAQ:AMZN. It is one of the so-called ‘FAAMG’ stocks – the big five US tech firms of Facebook, Apple, Amazon, Microsoft and Google (which now trades as Alphabet).

Amazon has been a constituent of the S&P 500 since 2005 and is one of the largest companies on the Nasdaq 100 index. Despite its immense size and value, it has never been a constituent of the Dow Jones. We’ll come on to why that’s the case later.

Amazon’s share price sees a lot of volatility throughout the day. The key factors affecting its price are its earnings releases, news about the company and the world’s economic health.

You can trade Amazon shares with a City Index account:

Amazon share price performance

Amazon has been one of the world’s best-known growth stocks for many years. Its share price was $130 back in 2010, compared to over $3700 today. That’s an impressive return of more than 2700%.

The S&P 500, meanwhile, grew by around 300% in the same period.

COVID-19 saw many companies struggle, but the boom in online shopping just caused Amazon’s growth to explode even more. It entered 2020 with a share price of $1870 and by the end of the year had surpassed $3200.

Learn more about Amazon’s share price history.

It is Amazon’s outsized $3700+ stock price that keeps it off the Dow Jones. The Dow Jones weights its companies according to their share price, not market cap. If Amazon joined, its weighting would be some 900 times greater than the current leading Dow Jones stock, UnitedHealth.

Why are investors interested in Amazon stock?

The chief reason why investors pay so much attention to Amazon is its compelling growth over the last decade and more. The firm, started by Jeff Bezos back in the 90s, has become almost unrecognisable from its humble beginnings, and investors want to take their position on where it might head next.

Amazon’s remarkable bull run must end at some point – no company can grow forever. But the corporation has survived the dotcom bubble, 2008 crash, resignation of Jeff Bezos and more. So what will end the current rally?

How to buy and sell Amazon shares

To buy and sell Amazon shares with City Index, follow these five steps:

Open a live account Search ‘Amazon’ in the platform Choose your Amazon market Decide whether you want to go long or short Set your trade size, and open your position

There are two ways to trade Amazon with City Index: CFDs and spread betting. Both are forms of derivatives trading, which means unlike investing in Amazon, you never own the underlying asset. So you can short the stock if you think it will fall in price.

CFDs and spread betting work in slightly different ways. Learn more about which is best for you.

How does Amazon make money?

Amazon makes money from three primary areas: retail, subscriptions and Amazon Web Services (AWS). Retail covers eCommerce sales from the website, including Fire and Echo devices. AWS provides cloud infrastructure to businesses, while subscriptions mainly covers Amazon Prime.

Retail

The retail division still dominates in terms of net revenue, earning over $230 billion in the US alone in FY2020. Amazon’s international retail division isn’t nearly as successful, with less than half the net sales.

Retail may bring in huge revenue, but its profit margins are relatively small. In the US, that $230 billion revenue translated to a profit of $8.7 billion. For the three years up to 2020, Amazon’s international retail arm wasn’t profitable at all.

AWS

It falls to AWS, then, to prop up the profitability side of Amazon’s business. AWS is growing fast, delivering profits of $13.5 billion in 2020 from revenue of $45 billion – a profit increase of almost 50% on the year before.

In terms of market share, AWS is a juggernaut. It controls around a third of the total global cloud market.

Amazon Prime

Amazon Prime, the subscriptions division within the company, is also growing rapidly. However, it remains dwarfed by both retail and AWS. It generated around $25 billion in revenue in 2020.

The corporation has also bought several subsidiaries over the years: including Audible, Goodreads, IMDb, Zappos and Twitch.

Is Amazon profitable?

Amazon is a profitable business, and has been for a few years now. In Q1 2021, the company announced an operating income of $8.9 billion, more than double what it achieved the previous year.

Amazon did struggle to turn a profit for a long time – in 2016, the company made headlines for finally posting profitable earnings four times in a row – but it wasn’t necessarily due to an issue with profitability. Instead, Jeff Bezos had long prioritised growth over income.

What that means in practice is that Amazon has reinvested its revenue back into the business, spending heavily on advertising and researching new product lines. Some of these, such as Echo, Amazon Prime and AWS have delivered success.

Others, not so much. The Fire Phone, for example, spectacularly failed to set the world alight.

Overall though, the strategy appears to be working. AWS has been the backbone of Amazon’s explosive growth in recent years, far outweighing the losses on other failed ventures.

Amazon market cap: how much is Amazon worth?

Amazon is worth over $1.8 trillion, making it one of the most valuable companies on the planet. It surpassed $1 trillion in value back in 2018, and looks set to hit the $2 trillion level too – joining the likes of Apple and Microsoft in the process.

Only six listed companies have reached $1 trillion in value:

Apple Microsoft Amazon Saudi Aramco Alphabet (Google) Facebook

Market capitalisation tells you a company’s total value on the stock market. To calculate it, you multiply the current share price by the number of available shares.

Who owns Amazon?

As a listed company, Amazon is owned by its shareholders. If you own a single Amazon share, you are a part owner of the business. However, some individuals own a lot more stock than others:

Jeff Bezos, Amazon’s founder, may not be the CEO any more – but he still owns the largest stake in the company. His 55.5 million shares give him 11.1% ownership

Advisor Group, an institutional brokerage company, owns a 7.1% stake in the business

Vanguard Group, the fund provider, owns 6.6% of Amazon’s outstanding shares

Andrew Jassy is the current CEO and former head of AWS. He owns just shy of 100,000 shares, or a 0.02% stake in the company

Board of directors of Amazon

Since Jeff Bezos stepped down as CEO and became Executive Chairman, Amazon’s board of directors has looked like this:

Jeff Bezos Executive Chair Andy Jassy President and CEO Keith B. Alexander Director Rosalind Brewer Director Jamie Gorelick Director Daniel P. Huttenlocher Director Judy McGrath Director Indra Nooyi Director Jon Rubinstein Director Thomas O. Ryder Director Patty Stonesifer Director Wendell P. Weeks Director

What you should know before trading Amazon stock

1. Don’t expect a dividend

Amazon may have shifted its focus toward profitability in recent years, but it has shown no sign of paying any of that income to shareholders in the form of a dividend. It has the free cash flow to do so, but chooses to reinvest in growth instead.

With CFDs and spread betting, you don’t receive dividends anyway – so this doesn’t make a huge difference.

2. AWS is key

The first figure most investors look for in an Amazon earnings report is revenue from Amazon Web Services. As the company’s main source of steady sales (retail revenues vary according to season), and main source of profit margin, solid growth in AWS tends to keep investors happy.

AWS is has double the market share of its closest rival, Microsoft’s Azure.

3. You can short Amazon

You don’t have to buy Amazon. If you believe that an upcoming earnings release will disappoint, or that a bear market is on the horizon, you can open a short position instead.

To short Amazon with CFDs or spread betting, you sell at the outset instead of buying. This gives you a position that earns a profit if it falls in price, and a loss if it rises.

You can practise shorting with a free City Index demo account.