Underperformance of the benchmark may provide us with an opportunity
A 'one off expense' for Amazon has put their Income into the negative
DCF valuation calls for an upside target of $189 per share
Is Googles response to AI slowing their growth expectations?
First up on the list is Amazon, currently trading 43% from the 2021 highs and underperforming the benchmark SP500 over the past 12 months with the biggest underperformance coming in the last 6 months. This is not necessarily a bad sign as the bullish run was heavily overbought and extended therefore the recent dip has provided a buying opportunity.
Amazon Daily comparison (SP500 (orange) vs AMZN (blue))
Overview
As a dominant leader in the E-commerce space, Amazon have the resources and customer base to fuel growth and innovation into cloud computing and AI, and remains well positioned in the market to continue to grow and expand its reach and services.
Notables:
Market cap: $1.13T
Revenue: $513.98Bn (TTM)
Revenue Growth: 9.4% (down from 21.7% in 2021)
One of expense: $16.8Bn
Revenue growth forecasts (3yr average): 16.6%
Discounted Cash Flow Valuation (DCF): $189 per share
We presume a portion of the cause of the decline in share price is due to the loss of $2.7Bn reported for 2022, a large decline from what has been a rapid income growth since 2018. As per their financial statements, Amazons expenses have increased in Technology and SG&A which has contributed towards this loss however the real kicker is the one off expense of $16.8Bn occurred in 2022 which came from their investment in Rivian Auotomotive (RIVN) in which they own 17.2% of, a stock which is down around 87% since its IPO in 2021.
Future revenue growth forecasts are lower than their historic forecasts however remain positive in double digits. Given their exponential growth in the the past decade, it's not surprising they forecast slightly lower.
Technically
After finding support just above $80, weekly Relative strength was showing divergence suggesting the bears were losing momentum even though the price was still declining. We have now seen a clear 'BUY" signal from the weekly MACD with positive momentum to the upside. A clean break of the daily resistance at $114 would give higher conviction to the upside signal.
Strategy
Hold core long positions until we reach the peaks on 2021 once again around $189
Leveraged positions should consider recent support at $90 a base that if broken could open up further downside in the short term
For the time being we appear to have found a base as momentum as per MACD and RSI shift bullish
Alphabet (Google)
Similarly to Amazon, after selling off the 2022 highs, Google has been an under-performer in comparison to the index, with the recent rally over the past week bringing the stock back towards the benchmark return.
Googles slow to market response to AI appears to have raised concerns with investors over the future capabilities of Googles AI adaption; perhaps been part of the reason for the recent underperformance. Despite this, the future appears promising for the generative AI as Google have reminded investors how heavily invested they are in AI, how long they spent working in the background, with Goldman Sachs analysts expecting Google to monetise the software by the end of 2023.
Key Notes:
Revenue: $284.6Bn (TTM) - growth remains positive
Net Income: $58.58bn (21/22) - down $16Bn ( -21%)
Discounted Cash Flow Valuation (DCF): $113 per share
Wall Street "buy" rating with price target high of $135
The DCF valuation for google is actually lower than current market price therefore as per this metric there doesn't appear to be much upside.
Alphabet stock vs sp500
Technically
We have pulled back 45% from the highs in the past 6 months and appear to have found a base. We can see the bullish divergence that has built up on the RSI coupled with continuous MACD "buy" signals. As of this week we have broken up and out of this consolidation phase which gives higher conviction to a bullish run. Despite DCF valuations dampening price, from a technical standpoint we see no reason why the stock can't return to retest the highs or beyond in line with its longer term uptrend.
Strategy
Hold core long positions as far up as previous highs around $150
Leveraged positions should consider hedges or stop losses below the range breakout/ previous low around $90
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