Amazon (NASDAQ: AMZN) has rebounded nicely after taking it on the chin following the most recent earnings report. Should traders be buying dips or selling rips in the shares of Bezos' baby?
Amazon shareholders large and small were left holding the bag following the most recent quarterly report from the company back in late July. The stock fell from $362.93 down to $304.59 in just a few sessions following the revelation that Bezos and friends were still in “loss leader” mode when it comes to their view on making money.
Institutions and analysts were very vocal in their insistence that the company start to shed the parentheses and post some profits on a consistent basis while still investing prudently in the future. Amazon's executives, however, remained staunch in their stance on how to best approach the company's “invest now, profit later” strategic approach. So, what does the near future hold for Amazon's shares?
What The Bulls Are Seeing...
The hardcore Amazon loyalists are likely to remain so as long as they can see the cool things on which the company is focusing. To their credit, Bezos and his leadership do a nice job letting the world know they are always looking way down the road at new technologies and ways to corner their markets.
The bulls point to the fact that the stock is cheap on a price-to-sales basis (their P/S comes in at just under two), that they have several billion dollars in cash over and above their debt, and that regardless of reported earnings the company is flush with operating and levered free cash flow.
Technically speaking, the bulls are lacking in much evidence to support their rose-colored stance. The stock has certainly bounced off the lows, but is now reading overbought on a short-term basis and is already looking a bit tired despite remaining well of the pre-earnings levels.
What The Bears Are Seeing...
The bearish crowd in the Amazon arena stands at the ready with a litany of bearish bullet points. First, they note that the stock's valuation is ridiculously high based both on a price-to-book basis (Amazon comes in at 14.77) as well as on a price-to-earnings and PE/G basis (Amazon comes in at more than 150 on its PE ratio using next year's consensus and more than 50 using the highest earnings estimate on the street; even using the lower PE, the PEG ratio comes in at two).
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Second, the bears on Amazon note that the action in the stock following earnings was a clear sign that investors may finally changing their stance on the company from being patient at all costs to being insistent on bottom-line results. Finally, the bears point to the fact that the recent bounce appears to be nothing more than a dead cat bounce/rally into which many shares should be sold.
Who Will Be Right?
Technicians say that Amazon needs to re-take the pre-earnings price high at $364.85 in order to completely reverse the negative status of the stock's chart. The technicians note that Amazon shares may have just completed wave “a” of a short-term “abc” upside correction and that a drop back down to $320.66 may be in the cards (wave “b”) in the very short-term before a push up to $364.85 occurs (wave “c”).
It will be that last push where Amazon will be at a “make or break” stage where a breakout crushes the bears or a failure could crush the bulls. On the other end of the spectrum, technicians note that any break and close below $304.59 would likely lead to a continued drop to the mid-$200s.
It appears to most objective analysts that the best way to approach Amazon shares is to enter either side of the fight as close to technical support or resistance as possible so as to minimize the damage if you are incorrect in your stance.
Guessing exactly when Bezos and company will decide to flip the profits switch on seems to be a fool's errand. Caveat emptor -– for both the bulls and the bears!
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