AMZN Premarket: Is The Sky Falling For Amazon Stock?

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Amazon stock continues to dig deeper into correction territory. Is the sky falling, and should investors consider dumping their AMZN positions? Read this before making a decision.

It took a while, nearly one year to be precise, but the S&P 500 has finally corrected more than 5% from its all-time high. The tech-rich Nasdaq has done even worse: down 8% from the peak of only four weeks ago, which is already one-third the size of the COVID-19 correction of February and March 2020.

Amazon stock (AMZN) - Get Amazon.com, Inc. Report has been doing even worse. Shares of the cloud and e-commerce giant are down nearly 15% from the top reached in early July. Is this a sign that investors should run for the exits, or an opportunity to own more AMZN following the recent dip?

Below, the Amazon Maven also reviews what has moved Amazon stock on Monday, October 4.

Figure 1: Amazon fulfilment center. Amazon

(Read more from the Amazon Maven: Amazon Stock: Here’s What Investors Should Do In October)

What moved AMZN on Monday

Amazon shares were down 3% on Monday, October 4. Such a dip is sizable, considering that the stock’s daily volatility, measured by one standard deviation away from the average daily return over the past 10 years, has been a relatively tamer 1.9%.

Below are the likely factors that pushed AMZN around during the second trading session of Q4:

The markets, not only equities but also bonds and others, have been freefalling in the past couple of weeks. The reasons are not as evident and definitive as, say, the start of the pandemic in Q1 of last year. What is clearer is that all stocks, outside oil and gas and a few defensive sectors, have been taking a beating. AMZN has not been an exception to the rule.

Maybe less of a factor, Facebook’s (FB) services like Instagram and WhatsApp were down for a good bit during the day. The stock sank by as much as 6% intraday. While the outage was unrelated to Amazon, it is likely that negative sentiment towards Facebook spread to other tech and cloud names.

Not all was bad news on Monday. First, Amazon launched its Black Friday deals on October 4, which should help to boost the company’s e-commerce revenues immediately. Second, a detailed report by research firm Oppenheimer suggests that Amazon should be a relative winner in the face of severe supply chain disruptions. Shares of relative loser ContextLogic WISH) - ) - Get ContextLogic Inc. Report

(Read more from the Amazon Maven: Here Is What Wall Street Says About Amazon Stock)

Is the sky falling?

It is understandable that, given such weakness in the market, investors might feel uneasy owning a volatile name like Amazon. However, we think that taking drastic measures during a pullback will likely hurt returns in the long run, especially in the case of a high-quality company and stock like Amazon.

The Amazon Maven has recently explained what is likely the best strategy for October, and we stand by our views. The near term looks quite uncertain, to be fair. However, buying Amazon on weakness and waiting long enough has consistently proven to be a smart move. This time, we think, will be no different.

If feeling jittery about having AMZN in the portfolio, keep the following piece of data in mind: when this stock was bought after a 15% drawdown in the past 20 years, the median forward one-year return has historically been a whopping 42% (see chart below). Past performance is not a guarantee of future returns, but it can serve as an anchor of hope.

Figure 2: Median one-year return on AMZN. data from Yahoo Finance

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Ouch! Amazon stock is down nearly 15% from its peak, while the rest of the market continues to pull back. What is the best course of action, regarding AMZN?

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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)

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Here Is What Wall Street Says About Amazon Stock

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Even though top analysts recommend buying AMZN stock, the company’s shares remain far from historical highs. Today, the Amazon Maven comments on Wall Street’s most recent takes on the stock.

Amazon stock (AMZN) - Get Amazon.com, Inc. Report is worth short of $3,300, nearing the bottom of Wall Street’s recent recommendations rather than the top. Edward Yruma, from KeyBanc, targets AMZN stock at $4,000, while Mark Mahaney, from Evercore ISI, sets his projection at $4,700. Average target price is $4,219 according to the top 30 best performing Wall Street analysts on Tip Ranks.

Despite a wide range of price targets on Amazon stock, not a single analyst supports a sell or a hold — consensus is a strong buy. Today, the Amazon Maven debates why AMZN has not reached its peak yet, despite broad-based bullishness, while we dig deeper into each of these experts' opinions.

Figure 1: Wall Street sign. Unsplash

(Read more from the Amazon Maven: Amazon Stock: Here’s What Investors Should Do In October)

Solid for the long term…

Among the most recent reports on Amazon, stock analyst Edward Yruma has one of the lowest price targets on the shares: $4,000, representing upside potential of 16%. According to Mr. Yruma:

“Amazon is the leading company across retail [and] across technology, but ultimately this is one of these very typical investment cycles for Amazon: it can go on for many quarters and we think ultimately we are not seeing the earnings catalyst we’re looking for to get more constructive on the stock.”

On the other hand, Mark Mahaney has recently raised his fair value estimate to $4,700 from $4,200, implying an upside of 36%. The analyst says:

“It’s pretty much the average multiple the stock has traded for the last couple of years. I do want to throw a warning, though. Amazon is aggressively investing and one of the negative surprises is the outlook of margin declines. […] If Amazon is ramping on all this distribution capacity, one of the first order impacts could be margin pressure before you get that revenue reacceleration, so I do worry for the near-term”.

…as Amazon keeps innovating

Bank of America’s Justin Post is positioned between the two analysts above. The analyst reaffirmed his buy recommendation on Amazon after the announcement that the Seattle-based company is developing its own point-of-sale system, in response to Shopify and PayPal’s own solutions for small businesses (SMB).

“The ability for SMB merchants to capture direct online sales, off of marketplaces, is a long-term potential threat to Amazon. So, we expect Amazon to offer a feature rich product with deep integration with Amazon’s marketplace, fulfilment, checkout, and payments processing capabilities (with a possible discount on payments processing).”

Why so far from its peak then?

The top Wall Street analysts recommend buying Amazon stock, but shares have not gone anywhere in the past couple of months. The Amazon Maven speculates that there are two main reasons why the e-commerce titan is still suffering the consequences of its most recent, ill-received earnings report.

The first is fear of overly optimistic expectations on the digital channel that may still linger from a pandemic-stricken 2020. E-commerce growth may be impacted by COVID-19, especially if consumer demand returns quickly to brick-and-mortar as social restrictions ease further.

Second, macroeconomic worries continue to weigh on the markets. Inflation has pulled back, but supply chain disruption still exists. Yields continue to rise, which tends to be bad news for growth stocks like Amazon.

True, analysts remain constructive on AMZN. But, as explained in an article written by Wayne Duggan, equity researchers may not be as objective as they should be in their assessments. Investors seem unwilling to blindly follow Wall Street’s lead in this case, which helps to explain recent share price softness.

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There seems to be a discrepancy: Wall Street collectively thinks that Amazon stock should be worth about 30% more, but shares remain in a drawdown since the start of July. Are analysts too optimistic?

Is the price right?

Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.

Alpha Spread’s user-friendly platform allows you to estimate a stock’s fair value –through valuation multiples, discounted cash flow, and more. I believe that the service is a must for anyone looking to own the right stock at the right price. Check out alphaspread.com and get started with a free trial.

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