(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Amazon.com, Inc.'s (AMZN) stock has fallen 17% from its highs as part of the technology-led broader stock market sell-off. However, technical analysis now suggests that stock may be due to rebound 11% in the coming weeks.
Shares of the e-commerce company saw further weakness when the company reported third quarter results that came in below expectations. That has led analysts to reduce fourth quarter revenue estimates.
The chart shows that the stock has broken free of two steep downtrends that started in the early fall. Additionally, the stock has found a meaningful level of technical support at $1,620, and that suggests the stock may rise and retest technical resistance around $1,770. Should the stock break out and rise above resistance around $1,770, it is likely to rise to $1,840, an increase of 11% from its current price of $1,660.
Additionally, the relative strength index has started to trend higher as well, which would suggest that bullish momentum is starting to move into the stock.
The stock fell following weak third quarter results, with revenue about 1% below estimates. That has led analysts to cut fourth quarter revenue estimates by 3% over the past three months to $71.9 billion.
Additionally, analysts have reduced estimated revenue growth rates for 2019 by 2% to $280.7 billion. Furthermore, 2020 revenue estimates have declined by over 3% to $332.0 billion. The slower revenue growth forecast has been a driver for the recent stock price declines.
Amazon's stock still doesn't come cheap and is trading at the upper end of its historical price to sales ratio around 3. Before 2018, the stock typically saw a peak price to sales ratio around 2.5. This may suggest that the stock is a little bit overvalued.
For the stock to sustain the rally, the company will need to post better-than-expected revenue growth in the fourth quarter, especially during the key fourth quarter holiday season. Additionally, strong revenue guidance for the start of 2019 will be key.
Amazon's stock has been one of the great growth stories of the past five years, and the recent decline has been steep. It isn't the first the time the stock has witnessed a steep decline, but as the business continues to mature, revenue growth will likely continue to slow, and that will put more pressure on the company's ability to grow its earnings.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.