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Bonds Are a 'Safe' Investment: A Big Lie Gets Even BiggerAmazon is a stock I've been watching ever since the company reported incredible earnings about a month ago. In a post following the earnings report I suggested Amazon could be a good 'fade' because I attributed much of the stock's post-earnings bounce to short-covering. That turned out to be a good call with some help from Mr. Market.
I think Amazon is a great company. I order books from their website literally every week, I'm a member of their Amazon Prime program, and I couldn't be more satisfied with their customer service. But the stock is a whole other issue. However, now I think is a time to be buyer, not selling, shares of the online retailer.
Most importantly, the company is in great shape. As I said before, the recent sell-off is attributable to both short covering and weakness in the overall market. But people seem to be forgetting the earnings report Amazon provided just a few weeks back. As my colleague Eric Buscemi reported at the time, Amazon's results were simply "amazing." Simply put, this quarter displayed the continuation and re-acceleration of operating momentum and growth -- the passion of Wall Street's analysts and fund managers.
Going forward, Amazon has several very interesting projects in the works. The most interesting project, in my opinion, in the flexible payments service -- a competitor to eBay's (NASDAQ: EBAY) wildly successful PayPal. The service undercuts PayPal on several different services and I believe that frequent buyers from Amazon are most certainly going to experiment with the service. Not only will this service help the company better understand its buyers, it will also potentially bring in new buyers.
People need to remember that Amazon has tremendous scale. As Georges Yared covered in his reply to my negative post on Amazon, the company spent huge sums of money building up its infrastructure in 2004-2006. As a result, growth in Amazon's top-line will likely occur without forcing the company to modify its infrastructure. This makes the company incredibly scalable. When considering this factor, the potential to increase consistently increase margins through the next several quarters becomes rather apparent.
The valuation on this stock is more difficult and, like I recently said about Baidu (NASDAQ: BIDU), it's really anyone's guess as to what this stock is actually worth. Wall Street seems to think the stock is worth $90 or more per share but it's very hard to say, especially because of the company's free cash flow generating abilities, which make a 'correct' EPS multiple hard to determine.
What's really important for stocks like this is going to be their ability to continue the "beat and raise" pattern that Wall Street craves. It's this pattern that forces analysts to increase their estimates for the company which, in turn, increase their price targets and ratings for the stock. In my opinion, it makes more sense to look for an attractive technical entry in this stock and employ stops to protect yourself.
I think the stock is currently sitting at an attractive technical entry point. To the right you can see my annotated daily chart for Amazon.
As you can see, the stock's recent slide from almost $90 per share to $74 per share has been on rather light volume without heavy distribution days. This means that most of the selling has been noise rather than large institutional shareholders dumping their positions.
In addition, you see that the stock is currently sitting at the 50 day moving average. The 50 day moving average often serves as a support level for shares because many buyers wait until a stock reaches this level to begin buying. Sure enough, the last time the stock touched the 50 day moving average (green arrow) it served as the low for the stock.
From the Stochastic Oscillator at the bottom of the chart you can also see that the stock has now entered the oversold territory. If you aren't familiar with the Stochastic Oscillator you can view my primer here.
I think that short term traders should buy Amazon on strength, preferably a break above the downtrend line I drew on the chart. This would indicate that the stock is beginning a reversal and that it's no longer a 'falling knife.' I would place the stop where I indicated on the chart (around $68 per share) because it served as support several times in the past and hasn't been broken since the stock broke out above this level about three months ago.
Amazon is a very interesting momentum story currently off nearly 20% from its recent highs. Its operating momentum is re-accelerating, it has several interesting projects in the works, any growth should come at nearly no cost because the business is incredibly scalable with the present infrastructure, and the current technical perspective on the stock looks very interesting.
Going forward, Amazon has several very interesting projects in the works. The most interesting project, in my opinion, in the flexible payments service -- a competitor to eBay's (NASDAQ: EBAY) wildly successful PayPal. The service undercuts PayPal on several different services and I believe that frequent buyers from Amazon are most certainly going to experiment with the service. Not only will this service help the company better understand its buyers, it will also potentially bring in new buyers.
People need to remember that Amazon has tremendous scale. As Georges Yared covered in his reply to my negative post on Amazon, the company spent huge sums of money building up its infrastructure in 2004-2006. As a result, growth in Amazon's top-line will likely occur without forcing the company to modify its infrastructure. This makes the company incredibly scalable. When considering this factor, the potential to increase consistently increase margins through the next several quarters becomes rather apparent.
The valuation on this stock is more difficult and, like I recently said about Baidu (NASDAQ: BIDU), it's really anyone's guess as to what this stock is actually worth. Wall Street seems to think the stock is worth $90 or more per share but it's very hard to say, especially because of the company's free cash flow generating abilities, which make a 'correct' EPS multiple hard to determine.
What's really important for stocks like this is going to be their ability to continue the "beat and raise" pattern that Wall Street craves. It's this pattern that forces analysts to increase their estimates for the company which, in turn, increase their price targets and ratings for the stock. In my opinion, it makes more sense to look for an attractive technical entry in this stock and employ stops to protect yourself.
I think the stock is currently sitting at an attractive technical entry point. To the right you can see my annotated daily chart for Amazon.
As you can see, the stock's recent slide from almost $90 per share to $74 per share has been on rather light volume without heavy distribution days. This means that most of the selling has been noise rather than large institutional shareholders dumping their positions.
In addition, you see that the stock is currently sitting at the 50 day moving average. The 50 day moving average often serves as a support level for shares because many buyers wait until a stock reaches this level to begin buying. Sure enough, the last time the stock touched the 50 day moving average (green arrow) it served as the low for the stock.
From the Stochastic Oscillator at the bottom of the chart you can also see that the stock has now entered the oversold territory. If you aren't familiar with the Stochastic Oscillator you can view my primer here.
I think that short term traders should buy Amazon on strength, preferably a break above the downtrend line I drew on the chart. This would indicate that the stock is beginning a reversal and that it's no longer a 'falling knife.' I would place the stop where I indicated on the chart (around $68 per share) because it served as support several times in the past and hasn't been broken since the stock broke out above this level about three months ago.
Amazon is a very interesting momentum story currently off nearly 20% from its recent highs. Its operating momentum is re-accelerating, it has several interesting projects in the works, any growth should come at nearly no cost because the business is incredibly scalable with the present infrastructure, and the current technical perspective on the stock looks very interesting.
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Reader Comments (Page 1 of 1)
8-15-2007 @ 6:35PM
Sheldon L said...
There is nothing that I disagree with my colleagues more about than the value of Amazon.com. I am not even sure AMZN is worth half its current price. On an earnings basis it is being valued at three times that of Apple - ridiculous.
It's return on assets and profit margins are miniscule.
95% of the shares are owned by ten entities plus the 'shorts'.
Forgive me Kevin, I do not mean to be discourteous but I question how you can write "Confusing potential with value" and then write this post.
At best AMZN is all guess work looking forward, and looking backward it is still a story stock.
From a value perspective it is one of the worst stocks in the investing universe. Alas, there are people I respect... You, Georges and Brian who like this stock, not to mention Bill Miller of Legg Mason fame, who is first rate - so on this one I will stand alone.
8-15-2007 @ 6:40PM
janet said...
alot of people are boycotting amazon because it is refusing to stop the sale of information on dogfighting..they are supporting it and perpetuating it with how to videos and books that train you to make a killer out of your dog! just as ebay was allowing animal parts to be sold, they however made the move to ban animal trade. stocks will drop with amazon because savvy people are signing petitions against their refusal to stop the dogfighting business.
8-15-2007 @ 10:40PM
Kevin Kelly said...
Sheldon--
I can understand why you'd think it was hypocritical to write a post like "Potential vs. value" and then write a positive take on Amazon.
However, I feel like it wasn't really hypocritical for a variety of reasons...
First and most importantly, I suggested this primarily as a trade, not as a long term investment. With a recommended stop, specific buying parameters, etc. this was intended to be a shorter-term position. Unlike Mr. Yared's work, my justification for this growth stock wasn't in the valuation, but the potential catalysts that lie ahead and an interesting entry point, in my opinion of course.
You're point on Apple is also interesting but if you look at both companies' free cash flow (the true earnings of a business, right?) the valuation disconnect is much much less.
You say that the business has terrible margins...but I'd have to disagree. It's margins are in-line or better than its bookselling peers. Throw in the fact that the business is incredibly more scalable than any of these booksellers and, in my opinion, it's clearly a better business. Any retailer isn't going to have the margins that Apple has...it's simply not a comparable business.
This is what makes a market work.