Shares of Amazon.com (NASDAQ:AMZN) fell more than 3% and closed below $700 as news of a Brexit rocked the markets. Earlier this week Maxim Group and JMP Securities upgraded Amazon to a Buy. Yahoo Finance reports an average price target of $802, Morningstar has a fair value estimate of $800, and S&P estimates intrinsic value at $745. After the dip investors may feel inclined to buy in. If investors purchase at these levels they should do so for a short-term trade rather than a long-term investment. Brexit gives the Fed the excuse it needs not to raise rates for the remainder of the year. This will keep valuations high and Amazon will recover. But Amazon trades just 5% below its 52-week high, and investors with a long-term focus should wait until 2017, at which point we anticipate a better entry point.
Amazon is expensive for a reason. The firm has one of the strongest moats in the consumer sector and is poised to benefit from a number of secular growth trends. These include deeper e-commerce penetration and increased mobile usage (particularly in emerging markets), the continued rise of the Internet of Things, and a shift toward digital media consumption. Amazon has grown its infrastructure in India where an estimated 1 billion people will be online by 2030, and has taken on Alibaba with its Amazon China offering. The rise of the Internet of Things and the transfer of massive amounts of data online has created a huge market for cloud computing, storage and database management services. Amazon has seized the opportunity with Amazon Web Services, which is now the market leader in public cloud computing by a long shot. Finally, as consumers continue to shift from cable TV to digital media, AMZN has rolled out peripheral offerings such as streaming music and video, which Jeff Bezos believes will help drive traffic to Amazon's core platform. According to Sandvine, Amazon's video service accounts for 4.26% of prime-time Internet usage in the US, compared to 1.31% just three years ago.
These secular trends will drive growth for years to come. However, the US economy is fundamentally weak and the stock market is a Fed-created bubble. GDP in the first quarter increased at a 0.5% annualized rate, the lowest amount since Q1 2014 (and this is with manipulated inflation numbers). Consumer spending has stalled and the unemployment figures are misleading. The low unemployment rate is a product of low labor force participation, while the strong jobs gains in recent months (with the exception of last month) are the result of employers firing full-time workers and replacing them with more part-time employees. Most of the job gains have occurred in the service sector and are low-skill minimum wage jobs. This is the reason for the disconnect between "strong" job growth and weak productivity and output growth. Last month we finally got a weak job reading, one that paints a more accurate picture of the US economy. The Fed knows the US economy is too weak to handle a rate hike, but Yellen cannot admit as much as her future at the Fed depends on Clinton becoming president. Brexit gives her the excuse she needs to keep rates where they are for the rest of 2016.
Yellen's refusal to raise rates will improve market sentiment and drive valuations higher. It won't be long before Amazon recovers and investors can earn a nice short-term return if they buy the dip. But we think it's a better idea to wait until after the election when either the Fed normalizes rates and pricks the bubble or is forced to admit that the economy is weak as the data increasingly contradicts everything they claim. The Fed can only paper over the cracks for so long, and we expect Amazon to fall to a more attractive level in 2017 after the fundamental economic weakness becomes more evident. At that point, it will be a much better time to invest.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.