Amazon’s Stock Faces More Declines Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Amazon.com Inc's (AMZN) stock has doubled in over the past year, with its valuation briefly soaring over $1 trillion. But now the stock has dropped by about 6% since reaching an all-time intraday high of 2,050, on September 4. Technical analysis suggests the shares may fall an extra 4%, pushing the stock into a correction, with shares down by 10% from their peak. (For more, see also: Has Amazon Stock Topped Out?)

Any pullback in the stock is likely only to be short term. That is because analysts expect the company to deliver strong earnings and revenue growth for years to come. (For more, see also: Why Amazon’s Stock Can Rise 45%.)

AMZN data by YCharts

A Correction

Amazon's stock has been rising since April in a technical pattern known as a rising wedge. It is a bearish technical pattern, suggesting the stock will fall. The shares may fall to a price of around $1,840, which is the next level of technical support. 

Additionally, bullish momentum has been leaving the stock. It too suggests the stock price will fall. The relative strength index (RSI) has been trending lower since peaking in late January at a level of near 90. But the stock has continued to rise, while the RSI has been trending lower, a bearish divergence.

Long-Term Bulls

Analysts are still very bullish on the stock long term. They are forecasting earnings to climb by almost fourfold in 2018 to $17.45 per share. This is followed by earnings growth of 46% in 2019, and 48% in 2019. 

Forecasts call for revenue to be robust too, growing by more than 32% in 2018 to approximately $235 billion. Growth will slow some in 2019 to 22% and then to 20% in 2020. 

Still, analysts see the shares powering higher, by an average of 13% to a price target of $2,164. 

Not the First Time

If the shares drop, it will not be the first time in 2018. The stock plunged by almost 17% in March. It resulted in the stock rising by more than 40% to its current price.

The pressure will be for Amazon to deliver if it wants its shares to continue to rise. Analysts expect third-quarter earnings to climb by roughly six times to $3.06 per shares. But what may be an even bigger challenge is satisfying investors expectations. 

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.