Amazon's Hot Stock May Plunge 15%

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.) Inc.’s (AMZN) hot stock may pull back by about 15% in the coming weeks, according to technical analysis. Such a move would wipe nearly $120 billion off the $820 billion company's market cap and set back many bullish forecasts that Amazon will soon become the first $1 trillion company by market value.

The stock has already risen by about 45% in 2018, easily topping the S&P 500's rise of less than 2%. But the significant surge has come at a cost now that the e-commerce company's stock at its highest valuation in nearly three years.  

Weak Technical Chart

The chart illustrates a bearish technical rising wedge, a reversal pattern. It is a pattern like the one seen in Intel Corp.'s (INTC) stock chart before its steep 12% decline. Based on the reversal pattern, shares of Amazon could see its stock decline from its current price of about $1,690 to about $1,450, a drop of about 15%. (See: Intel's Soaring Stock Is Due for a 10% Pullback)

The relative strength index has been trending lower since the middle of June, suggesting momentum is moving out of Amazon. Additionally, volume levels have also been steadily declining as well, indicating buying conviction may be waning. 

Stretched Multiple

Amazon's stock is now trading at its highest one-year forward price to sales multiple since the start of 2015, at roughly 2.8 times 2019 revenue estimates of $290.5 billion. Before 2018, 2.5 was the highest the ratio had reached.

Fundamental Chart Chart

Fundamental Chart data by YCharts

A Short-Term Pullback?

AMZN Annual Revenue Estimates Chart

AMZN Annual Revenue Estimates data by YCharts

However, the long-term outlook for Amazon still looks very strong driven by big earnings and revenue growth, making any pullback in the stock short-term. Analysts are still looking for steady growth out of the company, with revenue expected to climb by roughly 20%, while earnings are seen rising by roughly 60% in each of the next two years. 

Amazon's stock has undoubtedly had a big run-up thus far in 2018, and even if shares did pullback by 15%, it would hardly dent what has already been a stellar year for the company. 

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 holdingsInformation 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.

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