The price of Amazon (AMZN) stock has dived in August after the company reported that the tailwind provided by the pandemic may soon start to fade as the world progressively gets back to normal.
So far this month, the stock has lost nearly 4% of its value while the performance of its shares remains underwater for the year at minus 1.7%.
Could this dip be providing an opportunity to buy Amazon shares are a more attractive price? In the following article, we’ll take a closer look at the technical setup and fundamentals of the company to see if that might be the case.
A closer look at Amazon’s latest price action
Amazon shares briefly broke above a consolidation rectangle that emerged following the stock’s pronounced post-pandemic uptrend. Back in 2020, investors piled on the stock as the company emerged as a strong winner of the health contingency with millions of Americans relying on its platform to buy everything they needed while they remained confined within their homes.
This consolidation period along with the uptrend that started in March resulted in the formation of a pattern called a “flag”. Bull flags are considered a continuation pattern. This formation is commonly interpreted as a brief pause before the former uptrend resumes and that appeared to be the case for Amazon back in early July this year when the stock price briefly broke above the rectangle.
However, the price has been pulled back into the rectangle shortly thereafter following a disappointing quarterly report the company released on 30 July as the e-commerce giant reported forecasted earnings for the third quarter of 2021 that fell short of analysts’ estimates for the period.
At the moment, momentum indicators show that the negative sentiment toward the stock has perhaps gone a bit too far as the Relative Strength Index (RSI) has dived to oversold levels while the MACD has posted its lowest reading since October 2018.
This overly pessimistic attitude from market participants toward the company founded by Jeff Bezos could have already reached an extreme and that could result in a short-term technical bounce if investors decide that the sell-off has gone too far.
What about Amazon fundamentals?
Even though Amazon failed to dazzle investors with its latest quarterly report, the company has managed to reverse a downtrend in its growth rates from years ago. Before the pandemic stroked, revenue growth rates for the e-commerce business slid from an average of 30% in 2017 and 2018 to 20.5% in 2019 amid the impact of the US-China trade war.
Meanwhile, last year, the company grew its revenues by 37% while analysts are forecasting a 23% jump in the company’s top-line results this year. However, they are expecting a slowdown in growth rates in 2022 and 2023.
Amazon’s gross profit margins have remained near their historical average at around 40% while its net income margin moved higher from an average of 4% in 2018 and 2019 to 5.5% last year. Additionally, earnings per share nearly doubled during the pandemic.
Even though revenues are expected to slow down, earnings per share are expected to grow at an average rate of 26% in the next two years while the company is trading at only 57 times its forecasted earnings per share for the next twelve months.
If we assess Amazon’s valuation by using Peter Lynch’s long-standing price-to-earnings-to-growth ratio (PEG), the company is currently displaying a PEG of 2 based on its forecasted earnings growth and current market price of $3,201 per share.
Even though this multiple would point to Amazon as a potentially overvalued business, it is important to note that the company’s debt is fairly small and is almost fully covered by its current cash reserves while the firm’s return on equity (ROE) is particularly high at 27.4% and may justify this elevated valuation.
Based on a quick assessment of Amazon’s price action and fundamental data, the latest drop in its stock price seems to have opened an attractive window of opportunity for those who believe that this company still has much to give through any of its dozens of businesses.