I don’t like divorces.
I guess no one does… especially when the split causes volatility in one of your favorite stocks.
On the other hand… this can create buy-the-dip opportunities.
I’m sure you’ve heard about Jeff Bezos’ recent divorce… and how his wife has become one of the richest women on the planet as a result.
If you’re an Amazon investor, you were probably relieved by the news that the former couple settled their dispute last week and that Jeff Bezos will retain voting power over all the share the couple held together.
But does this mean that all troubles for Amazon are over? Or could there be something else lurking in the background.
Let’s find out… by applying my MSFTs filter.
At first glance, macro conditions favor Amazon.
Negative economic forces behind the global slowdown are losing momentum. It appears we are at a turning point, and growth likely will pick up again. Two things that could escalate the situation further are a disorderly Brexit or a breakdown in U.S.-China trade talks.
Even so, however, Amazon’s business model can survive a recession without much difficulty.
The average price of an Amazon product is $26. Generally, it’s higher-priced products that people avoid when economic conditions are harsh. Moreover, the cloud services segment and Whole Foods business should grow no matter what… though, if the global scene is gloomy, the pace of growth could slow.
However, Amazon is facing a more severe problem. It has grown too big for its own good and is beginning to resemble a monopoly.
This reality is not lost on the public.
Nearly every politician tossing his or her hat into the 2020 U.S. presidential election, including President Trump, is calling for a Big Tech breakup… that could have a big and negative effect on Amazon.
Even if it’s mostly political talk, it is looking like Big Tech, including Amazon, is going to face a significant increase in regulation in the coming years.
Macro Conditions: Fail
I started my career working in commercial property management in 2008.
Back then, Amazon’s revenues were more than 10 times less than what they are today, and conventional retail was still the primary shopping experience.
As we all know, over the last decade, this landscape has adjusted dramatically. Today, online shopping has overtaken retail… and this trend will continue.
Shopping from the comfort of your living room is just too convenient… and it will become even more so with the emergence of virtual and augmented reality.
Today, Amazon is also active in other fast-growing businesses.
It is the top cloud service provider, an industry that is expected to grow at a rate of 12.7% per year until 2022. With the Whole Foods expansion, Amazon is tapping into a market expected to triple by 2024.
Sector Potential: Pass
Amazon’s revenues and earnings are growing, and debt levels are under control. This is exactly what you want to see in a company you’re considering buying into.
However, you also have to look at price.
Amazon’s price-to-earnings ratio is 90.37. That’s crazy. There’s no way this business has that much growth potential.
I say: You’ve plenty of better trades on the market.
AMZN slid into a correction period from October through December 2018 but has since recovered and is now continuing its upward momentum.
The price is forming a “cup and a handle” pattern and is breaking above resistance levels. Both indicate that the stock should increase in value in the future and that, from a technical view, this is a good time to enter the trade.
Trigger Price: Pass
If I held Amazon stock, I would be looking to sell right now… not to buy. The price is too high.
Moreover, the risk that political forces will break up the Big Tech monopolies is high. And, as we get closer to the elections, I expect it to increase, significantly lowering Amazon’s stock price.
MSFTs Score: 5.5
For me to consider a stock to be a misfit, the score should be at least 8.5 out of 10.
Amazon doesn’t make the grade.