Amazon: The Recent Dip Presents a Strategic Buy Opportunity

Amazon’s long-term stock performance tells a story of exponential growth and volatility. From its early days, the company’s stock experienced a dramatic surge, reflecting its successful evolution from a struggling retailer into a global tech and e-commerce powerhouse.

This impressive rise was fueled by strategic investments in technology and infrastructure, notably through the development of Amazon Web Services (AWS). The release of Q2 2024 earnings has caused the stock price to drop to technically attractive levels, presenting potential buying opportunities. This article provides a fundamental and technical evaluation of Amazon to identify investment opportunities in the stock.

A Deep Dive into Amazon’s Price Structure

The long-term picture for Amazon reveals a strong positive momentum in its stock price, accompanied by significant volatility. The long-term quarterly chart below illustrates that Amazon’s stock price bottomed out at $1.29 in 2006 and then increased in a parabolic fashion, reaching $188.65 by 2021. This 14525% price increase within 15 years was due to intense competition, profitability challenges, and company’s long-term growth prospects.

During the early 2000s, Amazon heavily invested in infrastructure and technology, including its burgeoning cloud computing division, Amazon Web Services (AWS), which had not yet begun to generate significant revenue. Additionally, the company faced pressures from increasing competition in e-commerce and was grappling with profitability issues as it prioritized growth and market share over short-term profits. This period marked a critical phase where Amazon’s strategy was questioned, leading to a lower stock price as investors awaited clear signs of sustainable success.

Starting around 2007, Amazon began to demonstrate transformative growth driven by its successful expansion into new markets and innovative ventures. The launch and rapid growth of AWS became a game-changer, positioning Amazon as a leader in the cloud computing industry and contributing substantial revenue and profitability. Coupled with aggressive investments in technology, logistics, and a diverse range of product offerings, Amazon’s stock began to appreciate significantly.

Amazon’s strong focus on improving customer experience, embracing new technology, and expanding globally led to huge growth. This resulted in a sharp increase in its stock price, peaking in 2021. The stock’s rapid rise shows how Amazon’s long-term strategy turned it from a struggling retailer into a leading global tech and e-commerce company.

The peak in 2021 led to a significant drop in Amazon’s stock price due to the previous parabolic rise, which often resulted in sharp corrections. This sharp correction bottomed out in Q1 2023 at $81.43, leading to a strong rally that aimed to surpass the 2021 record highs. 2023 has been a year of recovery, and 2024 may continue to consolidate further to stabilize the 2022 drop.

Following strong Q1 and Q2 2024 performances, the Q3 2024 candle saw a sharp correction below the Q2 2024 lows. This correction, triggered by the Q2 2024 earnings announcement, has led to stabilization at lower levels, potentially setting up for another significant bottom before the next surge in the parabolic move.

Amazon’s Q2 2024 Earnings and Impact

Amazon’s financial performance for Q2 2024 presents impressive growth and significant improvements across key metrics. The quarterly revenue increased by 10% year-over-year to $147.98 billion, up from $134.4 billion in Q2 2023, as shown in the chart below. The North American segment led the growth with a 9% increase in sales to $90.0 billion, while the International segment saw a 7% increase to $31.7 billion. Moreover, AWS continued its positive performance with a 19% year-over-year increase in sales to $26.3 billion, highlighting its expanding dominance in the cloud services market.

On the other hand, the operating income surged to $14.7 billion, a significant rise from $7.7 billion in Q2 2023. This increase was driven by higher operating incomes in all segments, with North America contributing $5.1 billion, up from $3.2 billion, and AWS generating $9.3 billion, compared to $5.4 billion previously. The International segment also turned a profit of $0.3 billion, a notable improvement from the $0.9 billion loss reported in Q2 2023.

Additionally, the net income nearly doubled to $13.48 billion, compared to $6.7 billion in Q2 2023. The chart below illustrates the relationship between quarterly revenue and net income, showing strong growth. Despite a slight increase in revenue, net income surged significantly, which indicates effective cost management and Amazon’s profitability.

Operating cash flow surged 75% to $108.0 billion for the trailing twelve months, and free cash flow increased dramatically to $53.0 billion, compared to $7.9 billion in the previous year. These figures underscore Amazon’s strong financial health and operational efficiency, with AWS’s growth being a particularly notable highlight, reflecting its crucial role in Amazon’s overall success.

Key Achievements in Q2 2024

Amazon’s continued development in Q2 2024 highlights its aggressive expansion and innovative strides across various sectors. The company achieved record delivery speeds for Prime members in the first half of the year. This shows logistical prowess and commitment to customer satisfaction. Amazon also broadened its product selection by including popular brands such as Aéropostale, Bumble and Bumble, and Kiehl’s, enhancing the customer base. Additionally, introducing a Grubhub+ membership worth $120 annually for U.S. Prime members further adds value to the Prime subscription.

New AI-powered features like the shopping assistant Rufus and the playlist generator Maestro enhance the user experience across its platforms. Amazon’s Stores business expansion to South Africa, along with same and next-day delivery options, represents a significant geographical expansion.

In line with its sustainability goals, Amazon made notable environmental strides. It matched 100% of its electricity consumption with renewable energy in 2023. Additionally, the company replaced 95% of plastic air pillows with paper fillers in North America. The company also enhanced its health services. It expanded Amazon Pharmacy’s RxPass program, providing Prime members on Medicare with affordable prescription medications. Strategic initiatives include a significant $2 billion partnership with the Australian Government. This partnership aims to create a specialized AWS Cloud to bolster national defence and intelligence capabilities. The deployment of Zoox’s self-driving robotaxi test fleet in Austin and Miami reflects Amazon’s commitment to advancing autonomous vehicle technology.

Additionally, Amazon made a $1.4 billion investment in its Housing Equity Fund. This investment underlines the company’s dedication to addressing affordable housing challenges. These developments highlight Amazon’s broad ambitions to innovate, expand, and drive positive social and environmental impacts.

What is Next?

As discussed above, the quarterly chart shows that Amazon’s stock price remains within a parabolic rise. These parabolic rises indicate strong price volatility, which is also observed in the monthly chart below. The drop from the 2021 peak nearly reached the 61.8% Fibonacci retracement level, which fueled a strong bottom and initiated a significant price rally. However, this strong price drop has impacted the immediate-term rally and led to price fluctuations.

The monthly candle for July 2024 shows a sharp drop in the stock price, triggered by the Q2 2024 earnings release. This sharp drop suggests that the price may continue to seek support around the 38.2% Fibonacci retracement level of $129.78. If the price corrects deeply, this level might present a buying opportunity for investors.

The long-term trend line, starting from the 2014 bottom of $14.19, serves as a strong support in the event of a significant price drop. As long as the stock price remains above $107, Amazon remains positive, and due to the parabolic rise, the next move could be even stronger. To further understand the bullish outlook, the weekly chart shows that the stock price is approaching short-term support at $145, where it may rebound.

This support line represents the neckline of an inverted head and shoulders pattern, with the head at $81.43 and shoulders at $101.02 and $118.35. The head of this pattern, being a triple bottom, highlights the sustainability of the recent bull run. Investors may consider buying around $145 and accumulating more positions if the price drops further. The next bull run is likely to be stronger once this correction is completed.

Bottom Line

In conclusion, Amazon’s long-term trajectory presents a blend of exponential growth and volatility, driven by strategic investments and innovative ventures. The Q2 2024 earnings release, while causing a significant price drop, has created potential buying opportunities as the stock nears attractive levels. With Amazon’s continued focus on technology, infrastructure, and market expansion, coupled with its recent financial performance and strategic initiatives, the company remains well-positioned for future growth. The price levels of $145 and $129 are attractive entry points for long-term growth.