Tread Carefully With Amazon Stock After the Big Tech Pullback

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Is Amazon (NASDAQ:AMZN) stock a buy on the dip? It depends. On one hand, the two key “megatrends” driving shares higher this year (e-commerce and cloud computing) remain in motion. Until there’s a novel coronavirus vaccine, chances are these trends will continue.

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On the other hand, the sell-off in big tech stocks may mean the runaway bull market in the sector may be running out of steam. And, while Amazon shares have only fallen around 11% off their highs, the downward trend could carry on the near term.

Why? Even when accounting for its strong growth prospects, valuation looks rich here Shares today change hands at a forward price-earnings (P/E) ratio of 98! Even a slight contraction of this forward multiple could mean a big decline.

So, what’s the play here? Is it time to bet against what’s previously been foolish to bet against? Or, if you didn’t buy shares at lower prices, get ready to pounce?

Given the factors still working in Amazon’s favor, going short isn’t the best move. But, considering the similarities between this stock, and a similar situation from the dot-com bubble, it may pay to be cautious.

AMZN Stock and the Big Tech Correction

Is the recent tech stock pullback only the start of a sell-off? Possibly, but there’s no guarantee we are the verge of another meltdown. As Barron’s reported Sep 12, the factors that drove Amazon, along with its FAANG peers like Apple (NASDAQ:AAPL), higher remain in play.

And not just the stay-at-home economy. Aggressive Federal Reserve policy driving investors more heavily into stocks, along with retail investors “trading like its 1999,” are still in motion as well. In other words, the music hasn’t stopped just yet.

But, is now the time to either cash out, or go short AMZN stock, ahead of continued moves lower? Keep in mind its impossible to call a top. Yet, it’s an understatement to say valuations for tech stocks have gotten stretched these past six months.

Take, for example, Amazon’s forward P/E ratio. Sure, take a look at the stock’s historic P/E ratios since 2006, and today’s multiple isn’t close to being the highest. That being said, the company’s growth profile could soon change.

What do I mean? As the e-commerce and cloud powerhouse has scaled massively, it’s going to be tough to continue growing at rates on par with prior years. While the pandemic could push sales growth above 30% for 2020, analyst consensus implies sales growth could start to slow starting next year (18% projected growth).

Granted, 18% annual growth isn’t anything to sneeze at. Especially when expected earnings growth in 2021 (nearly 40%) exceeds that of 2020 (around 37.4% projected earnings growth).

Yet, projections are not guarantees. And, there are many factors on the horizon that could start putting the brakes on this growth train.

The Jury’s Out on Future Potential Gains

As InvestorPlace’s Ian Bezek recently wrote, there are multiple reasons why the huge run in AMZN stock may be done. These include sector-related issues like rising e-commerce competition from names like Shopify (NYSE:SHOP). But also, there are risks specific to the company, such as antitrust concerns, along with backlash over the company’s labor policies.

Yet, will these factors, which haven’t hurt it that badly as of late, cause tougher times in the coming years? Putting Amazon, and “tough times,” in the same sentence, sounds funny in light of the company’s current prospects.

However, even Amazon kingpin Jeff Bezos has conceded his company is not immortal. As he said back in 2018, “one day, Amazon will fail.” Granted, Bezos said that to fire up his employees, pushing them to focus on customer service to extend the company’s life expectancy. But, nothing last forever. Especially story-stock status.

It’s very similar to what happened with Microsoft (NASDAQ:MSFT) stock around the year 2000. At the time, the last “tech bubble,” that company looked unstoppable. Dominating its growth market, it seemed inevitable shares would continue to climb. Yet, buying then wasn’t a profitable move for investors. The bubble burst shortly after that, and it wasn’t until 2014 that MSFT stock retraced its then all-time high.

What’s the takeaway? Amazon could continue being a dominant player in the tech space. But, it’s debatable whether investors buying today will see gains similar to that of recent years.

Trends Remain Friends With Amazon, but Tread Carefully

For now, many factors remain on the side of Amazon. As we continue through the new normal, the company’s heavy exposure to e-commerce and cloud computing could mean continued knock-it-out-of-the-park results.

Yet, as they say, “past performance is not indicative of future results.” AMZN stock has been a winner for investors in the past 10 years. The next ten years? All bets are off.

On the date of publication, Thomas Niel did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Thomas Niel, contributor to InvestorPlace, has written single stock analysis since 2016.

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