Amazon stock (AMZN) - Get Amazon.com, Inc. Report shot higher on Monday, August 30, consolidating an impressive 7% rally in the past ten calendar days alone. Despite the richer share price and valuation, the Amazon Maven still believes that now is a good time to buy the stock.
Below are three key reasons why this might be the case.
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#1. Expectations reset
Second quarter earnings season was rough for the cloud and e-commerce giant. Due to slower-than-expected growth in the online store sub-segment over an atypical pandemic year, Amazon stock took a hit as Wall Street analysts and investors turned sour on the company’s near-term prospects. See North America ex-cloud revenue chart below and notice the sharp decline in growth last period.
The Amazon Maven has argued that bearishness was likely more a function of overhyped expectations than of secular weakness in Amazon’s business model. Consensus estimates for 2021 seems to have rushed ahead of what was reasonable in a post-pandemic environment, and Amazon stock’s selloff was probably justified.
Now, with expectations reset and shares still nearly 10% off all-time highs, AMZN may have the green light to start climbing from here once again.
#2. Interest rate risk averted
Recently, the Amazon Maven explained the implications of the Jackson Hole symposium held during the week of August 23. The event was an opportunity for global central bankers, including Federal Reserve chairman Jerome Powell, to discuss the direction of monetary policy.
Jackson Hole posed a risk that hawkish comments about a scale back in bond purchases and an increase in interest rates could hurt stocks. The risk was particularly meaningful for growth names, which have been most sensitive to yield movements in 2021 – the higher the rates, the worse of a setup for Amazon stock and its peers.
But chairman Powell’s address on August 27 had the opposite effect. The central banker made it clear that “the Fed could start tapering its asset purchases this year [but that] rates aren't changing soon”. The nothing-to-see-here address was perceived as a positive by the stock market.
With yet another monetary policy bullet being dodged, it is likely that growth stocks will gain some uplift. This is what seems to have happened on Friday and Monday, and the trend for the next few weeks may very well continue to be bullish.
#3. Flat for the past 12 months
Amazon stock has returned an impressive average of 32% per year over the past decade. However, unbeknownst to many, shares of the Seattle-based company have been flat for the past 12 months against a rallying S&P 500 that has climbed 29% during the same period.
Let us not pretend that AMZN is a bargain at a current-year P/E of 65 times. Shares continue to be priced roughly in line with the company’s strong fundamentals. But history has taught us that buying Amazon stock during pullbacks tends to yield better one-year forward returns. See chart below.
The Amazon Maven has presented three reasons to buy Amazon stock before the end of August. Do you think buying AMZN now is a good idea?
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(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting The Amazon Maven)