Matthew Timpane's Amazon.com (AMZN) pick has been very profitable-- with more to possibly come
Back in December, our very own Senior Market Strategist Matthew Timpane participated in MoneyShow's Top Picks special report for 2023. Six months into the year, two of his best investment ideas cracked MoneyShow's "Top 10" list. Below is a postmortem on Amazon.com Inc (NASDAQ:AMZN), and where to go from here.
Making the Stock Pick to Start 2023
When we recommended AMZN in December 2022, the stock had found support near its 2019 lows in the high $80 range. An additional floor was emerging at the -50% year-to-date level, an intriguing discount opportunity given the company's top-dog status in the cloud services industry, and the recent layoffs that posed short-term pressure.
Inflation had hit Jeff Bezos' baby hard, so any inflationary relief in 2023 would seemingly boost shares substantially. The company was also slashing capital expenditures (CapEX) to increase free cash flow and enhance profitability in the second half of 2022. This could continue into 2023, and given a higher CF/CapEX ratio, could fund the acquisition of new, longer-term assets. In fact, the stock’s price/sales ratio was declining to 1.66. When the ratio sat near this level in the past from 2014 to 2015, it laid out a tremendous buying opportunity in the long-term.
Where the FAANG Stock Sits Now
Fast forward to the end of July, and there's no shame in taking some profits up over 50%, especially as the stock stretches from its 200-day moving average and could consolidate. Watch and see how AMZN also handles its 50-day moving average, a trendline connecting March and may lows. You may want to reduce your position if it breaks below the 200-day, as a test could be in the cards.
Large options traders are targeting more upside, with the September 135- and 145-strike calls popular, as well as the October 130- and November 150-strike calls.
From a macro perspective, supply chains are normalizing and wage inflation is subsiding, as investors are now looking for improved margins, a catalyst we identified back in December, referenced above. Amazon.com beat first-quarter expectations with 9% year-over-year growth, and artificial intelligence (AI) adoption could produce a new wave of Amazon Web Services integration.
Many positives around AMZN remain, but we’d take some risk off the table -- especially with that 200-day moving average lingering. However, we do want to maintain exposure for any more potential upside into year-end, especially with large option traders targeting a move above the $150 level – so there's potential for another +20% of upside.
Options traders will be pleased to know that AMZN has rewarded option buyers over the past year. The equity's Schaeffer's Volatility Scorecard (SVS) comes in at 77 out of a possible 100, meaning AMZN has handily exceeded options traders' volatility expectations in the past 12 months. The stock's SVS sat at 88 in December.