Amazon: Recovery or Burst?
Summary:
● Amazon is gaining value on major tech fronts.
● A quick comparison between Amazon and top competitors
● A look at the technicals and fundamentals
After months of experiencing its fourth stock split, which I consider a smart move by the retail-tech giant, Amazon (AMZN), is at the edge of either seeing a collapse in value or a recovery from post covid sell-offs. Amazon is far beyond a retail company as it has proven successful in cloud-based services and entertainment. But with all of the applause surrounding the 25-year shooting star of a company, there might be little foxes of issues punching holes into the overall success of the company.
Despite its dominance, Amazon faces significant competition in the retail industry. One of Amazon's main competitors is brick-and-mortar retailers. Walmart (WMT) is keeping Amazon on its toes as recent reports show that during the second quarter of 2022, Amazon captured 6.5% of consumer retail spending and 3.1% of overall consumer spending. Although Walmart slightly outperformed Amazon regarding consumer retail spending with a 7.1% share, it fell slightly behind in total consumer spending at 3% (Source: Pymnts.com).
Beyond competition, this media-darling of a company has faced a growing issue with over-supplied inventory, particularly in its warehouse and fulfillment centers. This has led to sellers experiencing billions in losses and reduced efficiency. Amazon has also faced criticism from drop sellers purchasing products from other retailers and then selling them on Amazon. These sellers have complained that Amazon's policies and practices are designed to favor large, established sellers, which creates an uneven playing field and limits their opportunities for growth.
All these put this tech-retail giant at a crossroads between growth or a moonwalk down the path of regression.
Let's look at some analysis
Relatively speaking, since this stock had its IPO, this is one of the most sold off it has ever been, happening only two other times -the dotcom crash and the financial crisis- in its 25-year history. This might indicate to some investors that it's oversold, right? Maybe, maybe not!
Looking at the chart above, we can see:
The formation of the double horn pattern, which is uncharacteristic of a low-volatility stock like this
The presence of a pretty steep descending wedge and
A down arrow indicator on the monthly range of a 25-year-old stock.
The only times it had such down arrows were in 2000, 2005-2006, and 2008, which were marked by the dot-com burst, the U.S. housing bubble burst, and the financial crisis. Unexpectedly, it didn't go down during the coronavirus; you can tell by the position of the RSI at that point, so it's technically more oversold than it was during the Covid-19 pandemic or the 2018 Christmas eve sell-off. This leads to the question; Is Amazon on a path to recovery or about to experience a burst?
The bottoming pattern that seems to have formed between December 2022 and January 2023 might have inspired the expectation of a recovery as it shot up February highs but resumed sell-off after hitting its 161.8% Fibonacci level. On a short-term basis, you might see a cross-over in the moving averages but have to keep in mind the sell-off pressure that’s currently prevalent over this stock.
However, the RSI is holding on pretty tight to historically oversold regions with the presence of a double bottom which is symbolic of buying opportunities but overall, the technicals for this stock are unappealing.
Using a Fibonacci retracement from the dot-com high to the height of a double horn top on a monthly scale with high horns indicates what would be a precipitous drop. A long-term indicator of a renewed downtrend on the monthly has only been indicated by the financial crisis and the dotcom crash. Its real monthly long-term bullish uptrend didn't fully start until quantitative easing as it struggled to make it back from the dot-com sell-off.
When quantitative easing started, then the stock just started its parabolic climb to valuations that were unsustainable compared to its peers and expanded its warehouse space, throwing off all its book values, creating a top and a precipitous 56% decline from its all-time high in Dec 2022.
On the RSI, it's never been this sold off except for the dotcom crash, the financial crisis, and then now, and we know that both events were preceded by a bull run. So is this the beginning of a new bull era, or is this another prolonged entrenchment?
Well, the fact that it broke below the 100% Fibonacci retracement level in December 2022 from its dotcom crash long-term 25-year Fibonacci retracement is really scary.
It has a double horn which generally signifies an average 40% sell-off of which it has already done over 51%, coupled with being below the 50 and 200 Day MA
It’s the first time it substantially sold off and also below moving averages which is generally just a scare-off for many investors.
It's red in the chop zone, below its MA’s, and making lower lows and not higher highs.
It has already experienced five straight lower months from August to December 22 after a bear rally predecessor, which was followed by a minor recovery in January 2023 but a solid February sell candle. These all scream bearish.
Could this be a forthcoming repetition of the 98% post dotcom massive selloff where this modern-day tech giant almost lost all its value? Well, structurally, I’m going to have to say no because back then, it didn't have the assets or technology that it has now. They didn't have Amazon Web Services (AWS), a massively growing division, Amazon Air, Amazon Basics, the Artificial Intelligence they are deploying right now, or their current pricing power. Although in 1999, they were also a tech company, looking at them holistically, you’d say they are a better company right now.
On the flip side, are they now a retail company like Walmart or still a tech darling? AWS is a very technologically advanced subsidiary that has got its shoulders above the heads of counterparts such as Microsoft's Azure (MSFT), as AWS came into the scene way before them while having Azure catch up with them. With AWS providing real solutions to many server problems and Alexa sitting as one of the most used AIs, you’d have to ask yourself, can Americans function without Amazon right now? NO!
These guys are sitting on a very large cash hoard after raising in 2021 over $18.1 billion in debt sales across bonds of eight different maturities, ranging from two to 40 years with over 0.1% point above the yield on the same value of US 30-Y treasury bonds which had a risk free rate of 1.90%. This is an ultra-intelligent way to raise capital. They raised it at the highest valuation possible, for the cheapest amount of money they could, and they still have that deployable cash while they shrink their balance sheet.
On the weekly:
We can see the presence of a shooting star pattern which confirms our Fibonacci levels as the price fell after hitting the 161.8% levels
Recent crossovers could be indicative of a bottoming and a potential reversal to the upside.
Stock is in a downward trend along a descending wedge pattern and a Fibonacci level breach would spark a continued sell would possibly see a repetition of a similar sell-off like the dotcom crash and a wipe of value to $15 which in my terms is not unsustainable unless we mean WW 3 and a complete breakdown of our structural economy. But what we have is what we would consider a long-term falling wedge of which a structural break below the Fibonacci levels between $73 and $50 would see a fall to multi-year lows between $30 to $20, which would most likely not happen.
On a long-term basis for an options play, we might see a bubble within the $60 to $70 region till October 2023 and a run on the upside to previous highs. In a severe depressionary economy, we might see a fall along the levels of $50 to $45, which would be followed by a severe recovery to multi-year highs.
However, in the presence of a continuous fall below the 100% Fibonacci level, the next real support would be at $65.40, which is already a historical level pioneered by the 2018 sell-off and, coincidentally, the golden spot of the 25-year Dotcom retracement. This is an unclad signal suggesting that if the price breaks through this support… ALL BETS ARE OFF!
Any approach towards that level would imply the formation of a double adam bottom or a higher low that would lead to a hard upward rally similar to the post-2018 recovery. And this makes the $82 to $65 range. That's the range where any long-term investor can and should start accumulating positions for a dollar cost average on a multi-year dollar holding strategy. Set a sell stop at 5% below the $65-$40 line; if it breaches that, exit the positions…ALL BETS ARE OFF! But if it doesn't breach the $65-$40 line target, the long-term three-year target is $190.
Looking at the weekly charts, we have a double top on the weekly, which is the same as signified on the monthly, which has proven to be bad on a long-term basis, and a three falling valley which would most likely be followed by a crescendo before this stock starts to recover.
This simply confirms a continued sell-off and then a long-term recovery as they are strapped with a lot of cheap capital that they raised at very low-interest rates by issuing bonds at the highest valuation possible, which was very intelligent financial engineering as opposed to raising capital in the bond market which would have given them a lower valuation at a much higher rate that they would have to pay in yield.
We should applaud Amazon for intelligently using financial engineering to raise capital at next to zero interest rates with the highest possible valuation and not going ahead to spend it on raising capital in the bond market.
RSI is indicating oversold as it trading across levels not seen since June 4th,2018 which makes it a good sign for investors, although the chop zone is all red across charts which means personally, I couldn't own this stock except long call options which would be in line with my investing principles. A long-term investor with a multi-year investing strategy can get in at dollar cost and average his way down from the $82 and buy more heavily as it gets towards the $65 mark and sell off if it breaches $65, or you could take long-term call options.
Looking at the three falling valley formations within the descending wedge on the weekly, we can spot the play out of sharp sell-off to the bottom of the wedge which led to a break towards the upside of the wedge. This validates the importance of this wedge. A breach below would certainly not mean well as it would lead to a downward rally toward $50, and anything below that would be terrible, indicating a deep recession and might take at least two years to recover.
On the daily:
We can see price sitting on a critical 100% Fibonacci level,
The RSI is hanging in tight at oversold levels and
Presence of unfilled gaps on the upside.
As you can see, we have two unfilled gaps from August 2021 and September 2022. This suggests either the filling of overhead gaps or a continuation of downward gapping. So what is my thesis?
As China fully reopens, we should see a headline day and Amazon popping in the premarket due to China reopening, drop shippers revamping, and getting in goods, but then again, they are saying there is inventory oversupply.
Based on personal principles, I won’t be investing in this stock as it doesn’t meet my investing criteria, but it’s starting to look attractive, so I’m sure I’ll be itching to jump in within a few months.
Fundamentally, it has a strong ESG rating which might not make sense for many people but is key for a long-term investor. In terms of valuation who are we putting it against? Walmart? Are they the new-age Walmart? Well, I’d have to say yes. They keep increasing their value brands, mapping their logistics, etc., just like Walmart did. Cash flow per share is pretty good compared to competitors, their current ratio is in line with competitors, and ROI has been stronger although it doesn't offer dividends, unlike its competitor, Walmart.
I believe in comparison to Walmart Amazon is undervalued around 31%, whereas I believe Walmart is at full fair value.
Their price to book has improved substantially, and a stronger forward P/E and relative value means that they are increasing their value in proportion to their earnings. They look like they are cleaning up their balance sheets and are still expensive compared to other retailers.
Net margin is better than the industry average and should increase as they clean up their balance sheets. Its gross margins are better than its peers and specialty retailers. Although these reports aren't something to be excited or angry about, the main question is, are they here to stay? Well, of course, they are. I don't see anyone disrupting them with drone delivery, I don't see Walmart catching up to them. Walmart might be spending money trying to keep pace with them, but they have dividends and responsibilities that they have to pay to their shareholders, so they can't be as innovative as Amazon would be.
In summary, the current sell-off being experienced by Amazon is the longest it has experienced in decades, but I expect it to make a continued downward movement towards a completed 60% to 66% sell-off. I believe there would be a continued downtrend as the industry faces headwinds that would put you in a 3-month trading range of $60 to $80 and a 12-month target of $112.