AMZN Stock Defies Gravity—Rightfully So
Amazon.com, Inc. (NASDAQ:AMZN) stock has recently achieved new all-time highs. Investors have achieved a 9.3% return year-to-date and shares are currently trading at $738.20 apiece. That’s a hefty price to pay for a single share, but Amazon stock’s share price alone is not a determinate of valuation.
Amazon is a good example of climbing the wall of worry. AMZN stock was propelled higher by investors’ enthusiasm for top-line growth. Others were skeptics, thinking the shares would meet an untimely demise because Amazon was unable to attain a profit. Amazon proved the skeptics wrong.
AMZN stock’s performance was justified and the following reasons are why this level of performance could continue:
1. Relentless Growth
Amazon is consistently putting the naysayers to bed. Just as the consensus begins to doubt Amazon’s ability, the company pulls another rabbit out of its hat. Whether that rabbit is another blockbuster product or service, Amazon just cannot seem to fail.
Outstanding growth has produced incredible top- and bottom-line numbers of AMZN stock. First-quarter sales were up 28% to $29.1 billion. Operating income was up 331% to $1.1 billion. Net income came in at $513 million versus a net loss of $57.0 million.
Compounding these incredible numbers is the fact that Amazon’s devices are top-selling products on the company’s e-commerce sites. Amazon products carry higher margins that compound the incredible numbers. Amazon has taken e-commerce to a new level, becoming profitable in the process. The list of products and services Amazon offers to consumers seems endless and the prices are always competitive. I believe Amazon has more to offer and investors in AMZN stock will continue to be rewarded.
2. Cheap Price
After years of posting earnings in the red, Amazon has finally become a profitable company. Valuing a profitable growth company allows us to use earnings ratios that were previously not available to us. For instance, AMZN stock is currently trading at a price-to-earnings (P/E) multiple of 304. The problem with this multiple is that it is based on historical data. Earnings ratios are more compelling and indicative when we substitute forward-looking consensus numbers.
Amazon.com, Inc. is expected to grow earnings in 2017 by 82.84%, with consensus earnings per share (EPS) of $9.82. (Source: “Amazon.com, Inc. Earnings Forecast,” Zacks Investment Research, last accessed July 18, 2016.) Using these numbers and the valuation methodology popularly used by growth managers, I project a forward P/E multiple of 165 and a year-end 2017 price target of $1,627.
While that target sounds outlandish, it provides the argument that current prices are undervalued—pointing to further upside ahead for Amazon stock.
3. Bullish AMZN Chart
AMZN stock’s chart is a good example of what a bullish picture looks like on the charts. The current trend is upward, defined by higher highs and higher lows.
Chart courtesy of www.StockCharts.com
Early last year, AMZN stock produced a golden cross on the chart. A golden cross is a bullish signal that is produced when the 50-day moving average (MA) crosses above the 200-day MA. Traders use this signal to confirm a bull market is ahead.
The market sell-off that highlighted the beginning of 2016 caused the MAs to converge. The defining moment came when the golden cross reasserted control and prices trended higher. The inability of the MAs to sustain a bearish cross is indicative of a stock that exudes bullish pressure.
AMZN stock is also trading at all-time highs; there is no overhead resistance in the form of overhead supply. The path of least resistance remains up and evidence suggests higher prices on the horizon.
The Bottom Line on AMZN Stock
AMZN stock has been defying gravity for the better of the new millennium. Shares bottomed on October 1, 2001 at $5.51, and have traded higher since. The current AMZN stock price may seem high at $738.00 per share, but evidence suggests otherwise. All factors point to higher prices. Perhaps orbit is a possible price target?