Alright, alright, I give up! Despite a natural aversion to the clichéd, I will write the seemingly inevitable Cyber Monday piece about the two most traded internet retailers. I tried to resist, but honestly, the disparity in the fortunes of the two stocks and the fascinating sub-plots make it hard to resist.
The disparity in the performance of the two stocks is striking when you consider the comparative chart above. Amazon (AMZN) has had a tremendous last half of the year.
AMZN is up over 46% since the beginning of June. Usually, when my somewhat cynical trader’s eye sees a chart like this, my first reaction is to look for a reason to sell. It’s not that I have a problem with success; it’s just that when seemingly everybody has been buying the stock for 6 months there is usually inertia to the upside and a danger that any move to the downside will be exaggerated.
The reasons are fairly obvious. At some point most people who want to buy the stock already have and, as nobody likes to see a profit become a loss, any hint of a correction will see a wave of profit taking. That hint becomes more likely as analysts’ forecasts and market expectations become harder to match, and the law of large numbers comes into play. Exponential growth is hard to maintain.
I don’t believe this is the case for AMZN. The rise in Amazon stock is not the result of an increase in profits that is inherently unsustainable. It is more to do with the company, and CEO Jeff Bezos in particular, re-focusing on growth. From 2003-2011 AMZN showed that they can make money consistently, but in the last few years have begun to spend more of that money on expansion and innovation.
They have bought out competitors such as Zapos and are beginning to see the benefits in terms of revenue projections and even cold hard cash. I have some reservations about an acquisition strategy in the e-commerce space, as rewarding your competitors by enriching their owners simply serves to encourage others, but the remarkable “60 Minutes” interview last night suggested that Bezos is shifting track.
Amazon’s remarkably astute founder has, it seems, found a gap in the market. His talk of drone delivery systems appeals to the sci-fi fan in all of us and has added to his reputation as “the great, forward thinking, big picture innovator who will change our lives forever...” He is the latest in a long line of people to be seen this way. Bill Gates (MSFT), Steve Jobs (AAPL) and Elon Musk (TSLA) have all, at various times, been feted as the darling of Silicon Valley, and therefore of Wall Street.
History tells us that at some point this belief that the individual can do no wrong will fade, but for now Jeff Bezos, and therefore Amazon stock, is getting the benefit of adulation. Not even I am cynical enough to believe that this is a deliberate move by Bezos. A look at his past indicates that he has always been an innovator with grand plans that go beyond selling books and, more importantly that he has the executive skill to turn that vision into profit.
As MSFT, GOOG, AAPL and TSLA have shown us, that reputation as THE company that is going to change our lives can be ridden an awfully long way in terms of a company’s stock price. As long as that persists and AMZN continues to execute their growth strategy, then there is no reason to believe that the increase in the stock will stop any time soon, despite what looks like a sky high valuation.
eBay, on the other hand, is one ugly looking chart.
This kind of volatility is worrying enough for potential investors, but when you consider that the blue vertical lines represent earnings release dates, it is even more concerning. Back in September I showed a similar chart and pointed out that, to that point, the drops following earnings releases were down to management revising forecasts downwards. I concluded that, as expectations lowered, so a beat became more likely. Then, in October, they did it again. EBAY beat expectations of $0.53 EPS, reporting $0.54. Once again, though, a downbeat outlook caused the stock to fall following the report.
I hate to say it, but it looks like we are entering into the same pattern again. EBAY reported strong year on year growth in the first few days of “Cyber Week” and the stock has reacted accordingly. Once again, it seems likely that the market will be anticipating a turnaround from EBAY, and some appreciation from here looks likely. I would, however, be inclined to take any short term profit before the Q4 earnings release on January 14th. If EBAY keeps giving sober outlooks, then sooner or later they must come up with a spectacular beat, but until they do, the stock can only be a short term play. Investors who have been hurt in the last 3 Quarters will have itchy trigger fingers in January.
AMZN, on the other hand, could ride Bezos’s reputation as Disruptor in Chief for a long way. As long as he is being mentioned in the same breath as Gates, Jobs and Musk it is likely that the market will continue to shrug off bad news and focus on the potential.
Both AMZN and EBAY look like decent buys here, but for different reasons and certainly with different time frames. My preferred strategy would be to buy both, then sell EBAY at the beginning of January and use any profits to increase the investment in AMZN. Whether you agree or not, I hope Cyber Monday brings you all of your hoped for bargains.