Amazon stock (AMZN) - Get Amazon.com, Inc. Report continues to be a disappointing underperformer in 2021. The chart below shows that shares have lagged the tech sector (XLK) - Get Technology Select Sector SPDR Fund Report and the tech-rich Nasdaq index (QQQ) - Get Invesco QQQ Trust Report by a mile so far this year.
But last week, I saw the recent weakness as a buying opportunity. Not only that, but I have called AMZN “my Big Tech pick for 2022”. Below, I explain to our TheStreet audience why I think shares of the cloud and e-commerce giant could have a much better 12 months ahead.
Best to buy AMZN on the dip
The first argument for buying Amazon stock now and holding through the end of 2022, at least, is very simple: the share price is down. At last check, Amazon was nearly 10% below the early July peak. Not only have shares been underwater for nearly half a year, but they are also almost in correction territory.
There are many ways to rationalize the buy-on-dip strategy. Common sense in investing suggests buying low and selling high. I have plugged in the numbers and determined that, historically, the approach has produced better returns.
An investor that buys AMZN near peak prices has raked in average gains of 29% one year later. Not bad. But this figure jumps to 42% when the stock is 15% or more below the all-time high. Amazon stock is not quite there yet now, but I still think that the opportunity for outsized gains exists today.
Not all about the bargain price
To be clear, the appeal of buying AMZN today transcends its lower share price. At a higher level, the Seattle-based company continues to be one of the most relevant players in nearly all businesses that it currently operates: from e-commerce to cloud, and from tech devices to streaming services.
I have no reason to expect this dynamic to change anytime soon. Amazon, for instance, is unlikely to morph from undisputed market leader in US e-commerce, with an impressive market share of 41% today, to a secondary player in the space. Part of the reason is the company’s heavy investments in infrastructure to ensure that its high growth trajectory remains intact.
The problem is that, today, Amazon does not trade like a long-term winner. Rather, it is perceived as a short-term loser. Here is what I said about this topic, on my Seeking Alpha piece:
“On the labor side, Amazon has had to ramp up hiring […] precisely when labor shortages and wage increases may have hit a pandemic-recovery peak. On the product side, costs have ramped up due to inflationary pressures and transportation challenges, not to mention the need to reroute inventory to sidestep bottlenecks. In addition, Amazon has fallen victim to unsurmountable comps this year. […] From this short-term perspective, Amazon stock's malaise in the past six months or so is justifiable.”
I see the market’s focus on Amazon’s less exciting short-term prospects as an opportunity, not a reason to worry. Investors who are in for the long haul should not care much about whether Amazon stock price will be a bit higher or lower, say, in a couple of weeks. Look past the headwinds, and I believe that AMZN will be valued much more richly than its current $3,400 levels.
Is the price right?
Looking at a company’s business fundamentals is only half the work needed to find a good stock. How much one pays to own the shares is a key factor in the success of any investment. This is why valuation analysis is so important.
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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)