Amazon: Stock Looks Better On The Dip

Summary

• Amazon is 15% off the September all-time high. The deeper into the hole it digs, the more compelling the stock becomes.
• I am bullish at these levels, but balance my excitement with concerns over tough comps and an unfavorable market environment.
• Considering a multi-year horizon, I think that Amazon stock will continue to reward investors with above-market returns.
• Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Learn More »

Amazon (NASDAQ:AMZN) has been a loser in 2021. The stock, my Big Tech top pick for 2020, is down 8% for the year so far and 15% since the September all-time highs. Considering the company's strong performance in the holiday quarter and throughout the pandemic year, have shares become a good buy following the current pullback?

Today, I explain why I think that AMZN is worth considering on the back of slightly de-risked valuation and encouraging historical trends. However, I also see risks in the form of very tough comps in 2021 and a general market environment that will likely not favor growth stocks for another few months.

Why bullish?

The bullish case on Amazon stock begins with the company's business fundamentals and competitive advantage. For instance, the giant's dominance in e-commerce shows no sign of scaling back.

Growth in North America, supported by the shift in shopping habits that the COVID-19 crisis has accelerated, has combined with green shoot opportunities in international markets to create strong projected platform sales growth of 16% in 2021 off a very high base of nearly half a trillion dollars (see chart below). Things have not been less exciting on the Web Services side of the equation, a beneficiary of the global trends in cloud adoption, despite fierce competition from Microsoft (MSFT) and Alphabet (GOOG)(GOOGL).

Source: Statista

The better news is that owning the growth story has become a bit more affordable. Amazon stock's next-year P/E of about 45x is still not a bargain, but it is the lowest that it has been since May 2020 - back when the stock was in the earlier stages of the COVID-19 broad market selloff. For reference, this multiple was hovering around 80x in July of last year, when Amazon delivered a holiday-type quarter in the summer and led me to believe that the $2 trillion market cap was inevitable (it has not happened yet).

Then, there are the historical trends in the share price. Amazon has been a stock that, regardless of pullbacks, has eventually found its way higher. I believe this will continue to be the case for as long as growth remains a theme. For example, EPS is projected to surpass $200/share in five years while increasing at a 34% pace, pointing at a 2026 forward P/E of only 14x at current prices. I find it highly unlikely that the stock will remain anywhere near $3,000 apiece for as long as Amazon continues to at least match bottom-line expectations.

Back to historical trends, the graph below shows the average one-year forward return in Amazon since 2000, broken down by how far off the top the stock had been at the time of purchase. Notice that the opportunity of investing in Amazon increases progressively as shares dig deeper into the hole - although, certainly, so does volatility and the anxiety of holding shares.

Source: DM Martins Research, data from Yahoo Finance

Why cautious?

Having said the above, I have two reasons to be a bit cautious about the stock at these levels. First, Amazon will have to fight an uphill battle in 2021 only to keep up with the pace of an extraordinary twelve months of sales last year.

The graph below shows that, despite the massive gain of scale, year-on-year revenue growth of nearly 38% last year reached the highest levels since 2012 at least (blue line). The pace of growth (orange bars) landed at an eye-catching 17 percentage points in 2020, well above the previous multi-year record of less than 7 points in 2016. On the back of tough comps, Amazon shares could have a hard time finding traction.

Source: Data from Seeking Alpha

Lastly, I continue to believe that mega-cap, high-growth tech companies will remain out of favor in the market relative to value stocks in cyclical sectors for a while longer. The strong outperformance of the former group of stocks in the past decade has only barely been chipped away by the latter group in the past few months. I believe it is still way too early to "sell the news" of the upcoming economic recovery and rotate back into Big Tech.

The current market dynamic can be bearish to Amazon stock, in my view, but mostly in the short term. If considering a multi-year investment horizon, I think that shares of the Seattle-based company will continue to reward shareholders, especially those who take advantage of price declines to lower their cost base, with above-market returns.

Analyst’s Disclosure: I am/we are long AMZN, MSFT. 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.

Comments

[SuperPac]

If you are buying AMZN, you are essentially buying into years of growth that lies ahead, breaking into new biz segments and markets, dominance and a strong balance sheet that will fund that research, development and growth. So you are looking to treble and quadruple your investment in the years ahead. This correction is a good time to get in.

[Michael Clark]

BUYING THE DIP used to be called BUYING THE TRADING BOTTOM.

AMAZON, for instance.

1 Short 29 09/08/00 10/19/00 +15.188 +35.37 Exit Short Rule
2 Long 12 10/19/00 11/06/00 +8.812 +31.76 Exit Long Rule
3 Long 13 01/08/01 01/26/01 +4.562 +30.54 Exit Long Rule
4 Short 49 01/26/01 04/06/01 +11.130 +57.08 Exit Short Rule
5 Long 17 04/12/01 05/08/01 +1.510 +10.29 Exit Long Rule
6 Short 84 05/08/01 09/06/01 +8.030 +49.63 Exit Short Rule
7 Long 108 10/04/01 03/12/02 +9.270 +131.68 Exit Long Rule
8 Long 25 04/12/02 05/17/02 +5.850 +43.95 Exit Long Rule
9 Short 51 05/17/02 07/31/02 +4.710 +24.58 Exit Short Rule
10 Long 83 07/31/02 11/26/02 +8.950 +61.94 Exit Long Rule
11 Long 62 12/20/02 03/24/03 +4.300 +19.61 Exit Long Rule
12 Short 109 10/20/03 03/26/04 +17.890 +30.02 Exit Short Rule
13 Short 43 06/14/04 08/13/04 +13.120 +26.64 Exit Short Rule
14 Short 42 09/03/04 11/03/04 +2.820 +7.28 Exit Short Rule
15 Long 149 05/03/05 12/02/05 +15.850 +47.73 Exit Long Rule
16 Short 105 12/15/05 05/18/06 +16.870 +34.09 Exit Short Rule
17 Short 33 06/30/06 08/17/06 +9.590 +24.79 Exit Short Rule
18 Long 69 08/17/06 11/24/06 +13.320 +45.79 Exit Long Rule
19 Long 194 01/19/07 10/25/07 +51.190 +138.28 Exit Long Rule
20 Long 110 03/07/08 08/13/08 +22.600 +35.26 Exit Long Rule
21 Short 36 08/13/08 10/03/08 +19.690 +22.71 Exit Short Rule
22 Long 102 11/26/08 04/27/09 +39.160 +89.08 Exit Long Rule
23 Long 236 05/15/09 04/23/10 +70.030 +95.15 Exit Long Rule
24 Long 334 05/14/10 09/09/11 +82.860 +64.47 Exit Long Rule
25 Long 215 11/11/11 09/20/12 +43.420 +19.97 Exit Long Rule
26 Long 60 10/26/12 01/28/13 +37.800 +15.87 Exit Long Rule
27 Long 14 02/15/13 03/08/13 +9.100 +3.43 Exit Long Rule
28 Long 234 08/16/13 07/23/14 +73.320 +25.74 Exit Long Rule
29 Long 250 08/08/14 08/06/15 +212.660 +67.13 Exit Long Rule
30 Long 179 01/22/16 10/06/16 +245.280 +41.13 Exit Long Rule
31 Long 338 11/04/16 03/13/18 +833.130 +110.34 Exit Long Rule
32 Long 105 04/06/18 09/05/18 +589.590 +41.96 Exit Long Rule
33 Long 134 10/19/18 05/06/19 +186.520 +10.57 Exit Long Rule
34 Long 36 05/24/19 07/17/19 +168.750 +9.26 Exit Long Rule
35 Long 133 08/09/19 02/20/20 +345.520 +19.12 Exit Long
36 Long 121 03/13/20 09/03/20 +1,583.000 +88.68 Exit Long

ABOVE, #36 TRADE. LONG 3/13/20. CLOSED LONG TRADE ON 9/03/20, 121 TRADING DAYS, WITH A GAIN OF 88.68% AND 1,583 POINTS.

MOST RECENT TRADE. LONG 3/5/21. 4 TRADING DAYS SO FAR. Up 3.77% Position still open.

37 Long 21 03/05/21 04/06/21 +223.360 POINTS +7.44% Open

[Sergi Medina]

AMZN is trading currently at low historical levels, all things considered: average P/E, PEG, PFCF, analyst targets, estimated growth... So we are experiencing a windows of opportunity which has lasted several months, but I guess it will soon close.
AMZN will remain “expensive” as long as it grows so much and has so much quality. But all is relative. Growth is a little bit more risky than pure value, but given its quality and growth AMZN shareholders will surely be rewarded for years to come. My biggest position by far.

[eaglenation5]

@Sergi Medina My only position. 100%. It’s rock solid.

[Sergi Medina]

@eaglenation5 Amazing! :)

[Kmasse]

Looking at Amazon’s price, it seems like a crazy valuation.

But then again, I bought some shares in autumn 2016 at what seemed like a crazy valuation (usd 750 per share) and now 4 years later it seems like a bargain.

[Gary J is Rich on AMZN]

@Kmasse

"crazy valuation"

Define valuation. Actually it does not matter. AMZN trades on growth prospects not PE or whatever you mean. Always has and will continue.

[SomeGuy14]

We are now valuing stocks at reasonable earnings 5 YEARS FROM NOW! Amazing.

[machergriff]

Yep Covid should have boosted this stock big time.

[Gary J is Rich on AMZN]

@machergriff

You mean like the 70% in 1 year it did?

[ex institutional listed derivatives analyst]

I have been a long time investor in AMZN(since 2006). I think that their business is in a really good place, I never expected revenue growth >40% and Earnings > 100% YOY. AMZN accounts for more than 50% of my invested equity portfolio even though I am maxing out on my 401K because of the hyper growth in AMZN share price. It doesn't bother met at all that the share price has moved sideways the last 6 months. As long as AMZN continues to perform, the share price will eventually go higher. I don't expect AMZN to grow at > 40% like last year but it's the only Mega Cap that can grow at > 20% while profits accelerating even high than that because the company is turning into a service firm.

[Up and Away]

Over the years I have been a shareholder there have been positive and negative analysis on Amazon. Some look only at the PE maybe bc they think that that is what a average trader does but that, as we know, is the wrong metric in todays market. Cash flow is what should be used. Amazon is constantly investing monies in new ventures and it has paid off over the years. Long term investor understand this and are not interested in spinoffs or splits. They do not need to jack up the price doing a split and have day traders coming aboard. Either traders understand where Bezos has and will take this company and buy at todays level or they should stay on the sidelines. The stock has appreciated on its own and will continue regardless of whether Bezos is CEO or not. It is his baby and he knows what he is doing; has a great financial background and one has to have faith in his abilities.
Buy and hold through all the up and downs the market take you and you will not regret buying this stock at todays level and adding on in dips..

[KPAZ]

@Up and Away agreed. Long Amazon

[valuebug]

When Bill Gates stepped away, Microsoft lost its way. Not saying the same will happen to Amazon, but worth keeping an open mind.

[pommes.soda27]

@Up and Away you are totally right and Bezos stepped not away like bill gates. But we are on the stock market and this underperformance in comparison to stocks like Apple, Microsoft or alphabet is horrible. I hold my shares since 700$ but see no catalyst on the horizon besides of spin-off or stock split.

[trentn]

Finally figured how to value Amazon after reading Nomad Investment letters. Amazon is now 15% of my portfolio and growing. If you look at Price to Owner Earnings, it's the best in over a decade.

[Buyandhold 2012]

All stocks look better on the dip.

The bigger the dip, the better.

[Advanced_Tech]

I just recently purchased Amazon because I think the company is great but I really hope they’ll be smart as Apple and split the stock.i can’t see it growing fast with such a high price.hopefully we’ll get a 10 to 1 split announcement soon.it’s the best thing for both the company and the investors.

[ferraridriver]

@BillBoard1133 Stock splitting does not matter anymore since fractional shares are widely available.

[Bankable]

@BillBoard1133, Don’t split, keep the traders out and long term investors in. I hope they never split.

[DamianGrunt]

@ferraridriver not outside the US

[Gary J is Rich on AMZN]

AMZN for the long run based on growth prospects. No split and certainly to spinoff to cut off the growth. Value had its run.

[Hopeful17]

@Gary J is Rich on AMZN Amazon may have more problems in 2021----The company has been abandoned by the founder----a Truly Bad signal.

[Gary J is Rich on AMZN]

@Hopeful17

Nope, founder told me he's in total control.

[Kershaw]

@Hopeful17 abandoned....is a bit strong for a change of roles. AMZN has a deep bench and strong culture of upper management development that will provide strong leadership for years to come, and Bezos ain't going anywhere any time soon.

[Doug-]

Intrinsically I see no slow down. Bezos uses free cash flow as most important metric and no mega tech comes close to the projected percentage growth of Amazon in terms of free cash flow. The company is still dramatically innovating. It's still day one at Amazon. Institutions have been net sellers for past 9 months and Amazon is now very under owned at levels only seen at multiyear market bottoms. I would be a heavy buyer here. The negative sentiment is a plus.

[user 11202791]

will have a real challenge in 2021 earnings growth over 2020 earnings (largely inflated due to COVID), stock may move sideways and become a value stock

[Doug-]

@user 11202791 that is the rub - earnings are misleading. With Amazon you should only look at sales and cash flows.

[pommes.soda27]

Good analysis. I think 3000$ is a good entry point. EV/Sales at 3,95! Amzn is not expensive and positive catalyst should come in the next quarters. For example Stock Split for retail investors, aws spinoff and higher accelerate of aws.
Long since 700$.

[cwsdist.pf]

@pommes.soda27 I don't think you will see a stock split! And if you do it would probably be 3 for 1

[DM Martins Research]

@pommes.soda27 Thanks! Nice $700 entry point...

[pommes.soda27]

@DM Martins Research yes, but the last couple of months was a little bit disappointing. The whole world speak about Covid winners and high valued stocks, but amzn underperformed the whole market.