The stars are aligned up for Amazon.com’s (AMZN) stock, which is ready to break a 10-month trading range and rally to new highs: strong sentiment among bloggers and investors is placing the company back on the Wall Street radar, while a leadership change adds to the hype. Meanwhile, strong fundamentals provide a margin of safety to value investors, in case the hype dissipates. (See Amazon stock charts on TipRanks)
Amazon Back on Wall Street’s Radar
Amazon’s stock has been returning to Wall Street’s radar in recent months, as evidenced by several bullish indicators compiled by TipRanks. For example, Blogger Sentiment stands at 96%, well above the sector average of 72%. In addition, bullish News Sentiment stands at 77% in the last seven days. Finally, Hedge Fund activity is up by 660,500 shares in the last quarter.
All in all, Amazon’s stock receives a “Perfect 10” on TipRanks Smart Score, which is compiled from 8 unique data sets, including Analyst recommendations, Crowd Wisdom, Hedge Fund Activity, Media Sentiment, and multiple Technical stock factors.
Leadership Change at Amazon
The bullish sentiment for Amazon’s stock comes at a time when Amazon is undergoing a leadership transition. On July 5th, Andy Jassy, who ran Amazon’s cloud-computing business, replaced Jeff Bezos as president and CEO.
Bezos, still Amazon’s biggest shareholder, will maintain his grip over the company he started back in 1995, serving in the role of executive chair.
Amazon’s leadership change has fueled speculation on Wall Street that the company will pursue several popular policies to enhance shareholder value, such as splitting its shares to entice small investors. Another possibility is that Amazon would use its cash chest to buy back shares. According to Macrotrends.net, the company’s cash on hand has soared from $41.25B in 2017 to $55.021B in 2018 and $84.39B in 2019.
Analysts have been drawing comparisons between Facebook and Apple Inc. (AAPL), which pursued similar policies when corporate insider Tim Cook assumed the company’s leadership after its founder Steve Jobs left. As a result, Apple’s shares have rallied big time since then, attracting value investors, including Warren Buffett.
Amazon’s Fundamentals are Strong
Amazon’s return on the Wall Street radar and leadership change is supported and reinforced by solid fundamentals rather than just hype.
First of all, Amazon has three business segments: online retail shopping services, cloud computing services, and streaming services. In all three segments, Amazon enjoys a sustainable competitive advantage through barriers of entry, or “moats,” to use Warren Buffet’s term.
Additionally, Amazon enjoys economies of scale and networking in the online retail shopping segment, making it hard for other online retailers to match. It also enjoys an early mover advantage and economies of scale in the cloud computing segment, which other competitors strive to match.
Meanwhile, Amazon has developed bundling and lock-in relationships that entice users in the streaming business segment, though it lags behind its major competitor Netflix.
In short, Amazon’s positioning for take-off is both a sentimental and fundamental story.
How much higher can its stock go from here? The 31 analysts that followed the stock in the last three months see it trading in the range of $5500–$3,775 over the next 12 months, with the average Amazon price target standing at $4,299.35. That implies a 17.6% upside. Furthermore, Amazon has an analyst rating consensus of Strong Buy, based on 31 analysts offering ratings in the past 3 months.
What Could Go Wrong for Amazon?
Despite all the positive aspects described above, Amazon still has a few risks. One of them is decreasing returns to scale, a situation where corporations become too large to manage and too hard to grow. Wall Street is littered with stories of companies that followed this path, falling from the days of glory to the days of obscurity. In reality, such a scenario is unlikely for Amazon at this point.
Then there’s regulatory risk, via the prospect of Washington reigning in the internet giants. That would make it hard for Amazon to monetize its competitive advantage. Then again, this scenario is unlikely, as the Internet giant has the ways and the means to fight and overcome regulations.
Summary and Conclusions
Amazon’s shares have plenty of tailwinds that could push it higher shortly. Among them are bullish sentiment among bloggers, news outlets, investors, and hedge fund managers. A change in leadership fuels speculation for stock-holder-friendly initiatives, adding to the hype. Furthermore, the company possesses strong fundamentals that provide value investors a “margin of error,” if the hype dissipates in a market correction.
Disclosure: At the time of publication, the author held a position in Amazon.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
