Amazon’s Stock Plunge: Is a Prime Buying Opportunity Knocking?

Key Points

• Amazon shares have been under pressure since the middle of last month.
• A lackluster earnings report and a broader market sell-off have sent the stock down to multi-year lows.
• Despite the recent drop, there are compelling reasons to believe it's been exaggerated, presenting a prime buying opportunity.

It’s not often you see a $1.75 trillion market cap stock drop nearly 20% in just two sessions, but that’s exactly what went down with Amazon.com Inc NASDAQ: AMZN this week. It was the biggest selloff in a long time, and what made it all the more complicated for investors was that there were several factors in play. 

The first was the broader softening seen in equities since early July, with tech stocks like Amazon affected in particular. This meant that though Amazon started the month with a record high, as NVIDIA NASDAQ: NVDA started to pick up an alarming downward pace, investors were forced to reconsider their other tech positions. 

This risk-off sentiment gathered more momentum than last week, with a combination of lower-than-expected job numbers and the implosion of Intel NASDAQ: INTC injecting some real fear. Concerns that the Fed may have been too slow to cut rates and, by being so, have risked pushing the economy into a recession, which had an immediate effect. And so anytime a benchmark index like the S&P 500 drops 10%, you can be sure that even a behemoth like Amazon is going to feel some pressure. 

Amazon's Lackluster Earnings

In addition to the broader market turning down and investors being a bit more risk-averse, Amazon also delivered a lackluster earnings report. They managed to land a solid beat on analyst expectations for their EPS, which came in 22% higher than expected, but they missed on revenue. The latter print was still up 10% year on year, but it was a rare and worrying miss. 

In addition, Amazon’s forward guidance was also mixed, to put it mildly. Against a consensus for $158.33 billion in third-quarter net sales, Amazon’s leadership forecasted between $154 billion and $158.5 billion. There were some bright spots, such as year-on-year growth of 19% in the company’s AWS unit, against expectations on the street for this to be closer to 17%. 

All this conspired to send Amazon shares down 17.5% between last Thursday and Monday, which meant they’d shed as much as 25% from July’s all-time high. This is a confirmed correction, and worryingly for the bulls at least, it put Amazon back trading below where it had spent much of the pandemic. 

Analysts Reaffirm Bullish Ratings for Amazon

However, there are several reasons to think this drop was overdone and that it’s actually a solid buying opportunity. For starters, several analysts reiterated their Buy ratings on the stock this week, with Morgan Stanley and Rosenblatt Securities weighing in with price targets of $210 and $221, respectively. 

Considering Amazon was trading for less than $170 during Friday’s session, that’s pointing to a targeted upside of at least 30%. They’re not alone in their optimism either, with Barclays, Wedbush, Bank of America, and Piper Sander, to name just a few, all also reiterating their Buy, Overweight, or Outperform ratings, and all with price targets well above $200. 

Taking Advantage of Amazon's Stock Dip

For those of us considering taking advantage of the dip and buying into this theory that the drop is way overdone, the consistently higher closes from last Monday’s low lend a lot of weight. While the pessimist will say that the stock is still down more than 15% from July, the optimist could say it’s actually up 10% since Monday. 

There’s also the fact that Amazon’s relative strength index (RSI), a popular technical measure of how overbought or oversold a stock is, was screaming extremely oversold as recently as Wednesday. This week’s gains have pulled it out of the danger zone, as buyers have been more than willing to step in and snap up shares at discounted prices. A higher close next week would all but confirm the recovery rally is underway, putting Amazon on a clear track back toward the $200 level.