(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Amazon.com Inc. (AMZN) shares have been among the hottest in 2018, climbing about 31 percent versus an S&P that is down about 1.1 percent on the year. But the stock could be wading into choppy waters. It has been hard to bet against Amazon in 2018, but from a technical and fundamental standpoint, the stock appears to be overvalued and overextended. Those two conditions could lead to a sharp decline of nearly 8 percent from its price around $1,560 on March 22, and almost 11 percent from its all-time high around $1,617.
Amazon's stock price has run higher since the middle of February as analysts have been piling on the hot hand, upping their price targets aggressively. Of the 45 analysts that cover the stock, 96 percent have a "buy" or "outperform" rating on it, according to YCharts. Analysts have looked for new ways to increase the projected revenue opportunities for Amazon, from smart home opportunities, as noted by JP Morgan, or aggressive advertising expectations, as indicated by Jefferies.
A Decline to $1,440
With Amazon shares nearly 5 percent off their all-time set on March 13, the stock is quickly approaching a critical support level around $1,500, which served as a level of stiff resistance as the stock was rising from February 16 through March 5.
Should shares of Amazon fall below $1,500 it could trigger an even further decline perhaps to $1,440. We can also see that Amazon has broken its short-term uptrend. (See also: Whole Foods Executives Jump Ship Under Amazon.)
Lots of Momentum
All the excitement in Amazon has put a lot of momentum into the shares, and is reflected in a relative strength index (RSI) that reached atmospheric heights of nearly 90. That's well above overbought levels, which comes at 70 or higher, at the end of January. But even with the most recent surge, the RSI again topped out at 76. But what makes the most recent rise worrisome is the RSI has been trending lower, despite the stock reaching new heights. That can be viewed as a bearish divergence indicator.
Investopedia article, Amazon is currently trading at more than 2.6 times 2019 revenue estimates of $284.03 billion. And that puts the stock at its highest one-year forward price-to-sales valuation since the start of 2015. Previously, the stock had not traded above 2.5 times one-year forward sales estimates. (See also: Why Amazon's Record Stock Gains Are Over.)
Betting against Amazon has been foolish in 2018, which means the bulls could find any reason to start pushing the stock higher again. But for now, the risk is rising that the stock could be on the verge of a steep decline.
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.