Amazon Overbought And Overloved After Historic Rally

Amazon.Com Inc. (AMZN) emerged as the one of the first quarter’s biggest winners, increasing market share after traditional retailers and shopping malls shut down as a result of the COVID-19 pandemic. However, the e-commerce giant experienced growing pains as a result of the buying surge, limiting some products and delaying shipments. These roadblocks negatively impacted Q1 2020 profits, with $5.01 earnings-per-share (EPS) missing estimates by more than $1.00, despite a 26% jump in revenues.

The company has been pumping capital into infrastructure expansion in the second quarter, forcing CEO Jeff Bezos to warn about operating income. That hasn’t stopped investors from scooping up shares at a rapid pace, lifting the stock above $2,900. A string of Wall Street upgrades continues to stoke the upside despite overbought technical readings, but the lopsided reward-to-risk profile may now be too extreme for most investors.

Amazon Bullish View

RBC Capital analyst Mark Mahaney summed up the bullish view on Amazon in June, lifting his price target by 22% to $3300. He declared the company was a “structural winner” in the pandemic following an annual survey, noting that “results clearly support the idea they are likely the best global play off online retail”.  He notes that Prime subscriptions are adding to the upside as well, stating that “penetration surged to 67% vs. 59% in 2019. We see Amazon rapidly approaching 200 million Prime subs worldwide, up from 150 million in January.”

Wall Street And Technical Outlook

Wall Street consensus has priced Amazon for perfection, with an astounding 39 ‘Buy’ ratings and 2 ‘Hold’ ratings. Just one of the 42 polled analysts advises that investors sell the stock at this time.  Price targets currently range from a low of $1987 to a street-high $3500 while it’s currently trading about $150 above the median $2841 target. These numbers continue to tick higher with price, indicating it can trade even higher as long as the company fires on all cylinders.

Amazon is tough to buy from a technical perspective because relative strength readings have reached extremely overbought levels that have triggered multiple reversals since 2003.  In addition, the rally has stretched to three standard deviations above the 20-month moving average, also indicating the upside may be unsustainable in coming weeks. Sidelined investors are rooting for that to happen because it could set up a low-risk buying opportunity at much lower prices.