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How to Protect your Wealth by Investing in AI Tech Stocks


Companies / Amazon Jun 03, 2022 - 04:51 PM GMT

By: Nadeem_Walayat


The stocks bear market continues with most AI tech stocks putting in new bear market lows during the past week, with key exceptions being Facebook and AVGO. Whilst Apple, Microsoft and Nvidia were the weakest stocks of the week, though all stocks rallied strongly Friday led by AMD which ended the week up 10% followed by Micron at +6% which are definitely two stocks to aim to accumulate during any further market weakness.


I have always been a skeptical investor in Amazon, eager to cash in profits and not get too carried away with the fantasy that Amazon is of the same caliber as the other FAANGS, much as i rejected Netflix years ago. Where I have always been puzzled by the high multiples nevertheless went along for the ride to some degree. However, at the same time have been aware that if there is one tech giant that could experience a catastrophic valuation reset then that tech giant is AMAZON, which despite the bear market delivering a deep near 50% discount on the stocks high is still trading on a high multiple of 43X earnings which is still far too high and thus I cut my maximum exposure to Amazon a couple of weeks ago including warning that the the stock price could continue to collapse all the way down to $1000 a share.

The stock is trading on a PE of 43 whilst Q1 revenues growth was just 7%, it's slowest in 2 decades with guidance for even lower growth for q2 of 4.8%, which is more akin to to a stock trading at below the S&P average of 20 at say a PE of 18. Thus Amazon is hugely overvalued by as I pointed out 2 weeks ago so anyone investing in Amazon today is banking on the lemming fund managers once more bidding the stock up to ridiculously high multiples for reasons I have never understood why.

The latest results were a disaster which as I pointed out at the time meant that despite the stock price dropping to a low of $2200 actually resulted in an INCREASE in the PE ratio Which means the stock was more expensive AFTER the earrings then BEFORE earrings when the stock was trading at above $2800 as the above chart illustrates which is NOT GOOD! Not good at all as $2200 today is the same as if Amazon were trading at $2800 on an earnings multiple basis, and if Amazon continues along this path then it could well experience several sharp quarterly earnings drops in the stock price all whilst the PE multiple stays constant at around 40.

Where is the growth going to come from?

Amazon Prime appears to be in the process of topping out.

AWS - Whilst 85% of the companies revenues come from their retail business, however all of amazon profits are generated by AWS that continues to grow at a healthy rate with a Q1 profit margin of 35%.

The bottom line is that Amazon is a risky stock that can only regain it's all time highs if other investors once more ignore it's high multiples. So realistically Amazon should be moved to the high risk stocks portfolio where along with Tesla, Corsair and the Chinese tech giants should ranked at risk 3, which is where it may eventually end up advance of which I am once more dropping my max exposure by another 25%, which means my exposure jumps from 52% to 74% and so I rank the stock as a secondary at No 11 on my list with Qualcom nudging higher to become primary and thus I am further increasing my max exposure target to Qualcom.

One of the reasons why many obsesses over Amazon is because it is a retail monopoly which is probably why only a few weeks ago many clueless investors ware FOMO-ing into amazon on the basis of it's stock split announcement where in most cases when the stock price was trading at over $3000! As if the stock split would magically send the stock price soaring into the stratosphere.

I still cannot entirely fathom how can Amazon be trading on a higher PE than virtually every other primary AI tech stock apart from Nvidia? Twice that of Google, Triple that of Facebook, and nearly Quadruple that of Qualcom. So investors need to tread very carefully with Amazon where despite the price falls to date need to beware of very serous downside risk as there is a lot of dubious financial engineering going on in this corporation that can easily fool even so called sophisticated investors.

Amazon $2295 - P/E 43, EGF -68% - 76% Invested (target exposure reduced again), 1.4% of portfolio, Buy zone $2050 to $1800, My limit order is at $1852. Not much more buying for me in Amazon, target is about 1.6% of portfolio as this stock could surprise to the downside i.e. it really could even crash all the way to $1000, though with heavy support ahead at $1700. Still at the end of the day it is an AI tech stock so should eventually resolve to new all time highs even if it takes a while to get there.

This article is an excerpt from my recent analysis on the current state of tech stocks AI Tech Stocks Current State, Is AMAZON a Dying Tech Giant? that was first made available to patrons who support my work.So for immediate first access to ALL of my analysis and trend forecasts then do consider becoming a Patron by supporting my work for just $4 per month.

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By Nadeem Walayat

Copyright © 2005-2022 (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction.

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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