Since the beginning of September, the technology sector as fallen sharply, with the Nasdaq 100 dropping by around 11 percent. Amazon.com Inc. (AMZN) has not been immune to this decline, also falling by approximately 11%. However, the drop for Amazon may still grow worse as the stock breaks down on a technical basis. It could result in the shares falling by as much as another 15% from its current levels to around $2,800.
Amazon's stock is not cheap, either. It trades at a very high premium on a price to sales basis, which has been something that analysts and investors have used to value the company in the past.
Amazon vs. the NASDAQ 100 ETF
Technical Breakdown
The technical chart shows the shares have fallen below a key uptrend, which has been in place since March 16. The stock first broke this uptrend on September 4 and then failed to retake it on September 10. The break of this uptrend is a significantly crucial bearish indication. Now the stock is sitting on a level of technical support at $3,100. Should the stock fall below that level of technical support, it could drop to around $2,800. There is the potential the stock falls even further, perhaps to as low as $2,670. That would be a decline of about 15% from its price of roughly $3,150 on September 11.
Additionally, the relative strength index has been losing momentum after peaking at a reading above 70 in mid-July and trending lower since. The RSI now sits at around 44, which suggests that the stock is losing a lot of bullish momentum and that the shares may continue to drop towards those lower price levels.
Amazon technical chart
Stunning Growth
Analysts forecast robust earnings growth, rising by 37% in 2020 to $31.60 per share, and accelerating to 40% in 2021 and 42% in 2022. Revenue is estimated to be very strong, too, rising by about 31% in 2020 to about $367 billion, and an additional 18% in 2021 and 16% in 2022.
Very Expensive On Historical Basis
Despite the significant earnings and revenue growth, the stock is not cheap by any stretch. It currently trades for around 72 times one-year forward earnings estimates, which is a very high multiple and above its average of about 65 over the past 20 years.
Amazon PE ratio
Additionally, the stock trades for a price to sales multiple on a one-year forward basis of around 3.9. That is well above its average of 1.97 over the past 20 years, and the upper end of the historical range. The only time the stock traded with a higher sales multiple was in October of 2003 when it reached four, and before that in late 2000, when it climbed over 4. The high multiple suggests that the stock is not cheap at his current price, despite the significant earnings growth down the road.
Amazon price to sales ratio
There is no doubt that Amazon is the premier E-Commerce company that will have revenue and earnings growth to push the stock price higher in the future. However, it does not mean that the stock is a little bit ahead of itself, currently, after having a tremendous run off the March lows, more than doubling in six months. It just means that the equity needs a period to consolidate and to find some firmer footing to build off of so that shares can push higher over the long-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future results.
