Amazon is one of the most ridiculously overvalued companies trading on the NYSE. Let’s have a look at what the Elliott Wave structure says of this company’s future stock price prospects.
First, a quick run-down of the fundamentals. Amazon generates most of its earnings from AWS, and only a paltry amount from its retail operations. AWS is coming under more and more pricing pressure from competition, simply because the margins are “too high”. The competition is not so much from Microsoft and Google – yet – but rather, from smaller players, which are aggressively moving to cut prices and provide more computing and storage power. Because of the smaller size of these competitors, the financial mainstream news media isn’t yet picking up on this, but it’s happening as we speak.
In other words, the most profitable part of Amazon’s operations is going to suffer in profitability from here on out, making the P/E-350+ firm even more ridiculously expensive at current price levels.
[UPDATE 2018-07-30: The political risk for Amazon has increased considerably lately, as the US President Trump has hinted at antitrust action aimed at Amazon. Read more at this link from Zero Hedge: https://www.zerohedge.com/news/2018-07-23/they-have-gone-crazy-against-me-angry-tweet-trump-hints-amazon-antitrust-action ]
Let’s go into the Elliott Wave structures. Here’s a weekly chart of AMZN to kick off with:
I won’t go into detail why I’ve counted the waves as I’ve done, since I’m using my proprietary extensions to the Elliott Wave Theory. After topping out in late 1999, Amazon entered a 10-year long Running Triangle-pattern, which ended in 2009 around $77. The stock then took off in another large impulsive pattern, which seems to be a Double Extension impulse (common in panic-buying market reactions).
I’m reasonably certain of the wave pattern up until wave 2. After that, the wave labels become less certain. Let’s go to a Daily chart and have a look at the last few years in greater detail:
From the label 3, pattern certainty decreases somewhat, because wave 3 could still be going on. But I find that unlikely – and my presently preferred wave count says that wave 5 is in progress, and that the entire impulse from the 2009 lows, is a Double Extension pattern, which has caused wave 5 to become a greatly and ridiculously overextended wave.
The blue trendlines intersecting recently, stem from the Running Triangle pattern, and Elliott Wave triangles in wave positions 4 and B tend to end close to where the trendlines intersect. However, the rise in the Amazon stock the last few years is larger than what a Running Triangle would normally suggest, which is a minor strike against my interpretation.
If we look at my proposed wave 5, I’d say there’s an excellent chance that wave 5 itself has become a Double Extension impulse, with a large wave III and an even more outsized wave V. There’s not yet enough details to say for sure if wave V is ending here, but one interpretation of the developments since wave IV, suggests that a top is close at hand.
If Amazon tops here, and actually ends a Double Extension impulse as my charts suggest, then it’s possible that it’s going to retrace all the way back to $77. Outbreaks from B-waves and 4th-waves are often retraced 100% or more.
In my opinion, Amazon is a fundamentally dangerously overvalued company with very few legs to stand on relative to its current market cap. And there is a plausible wave pattern which suggests the stock could top out somewhere near current prices, and then drop precipitously.
If I’m wrong in my Elliott Wave analysis, it would probably be with regards to wave 3. But even so, the recent Double Extension impulse from 2017-01-03 needs to be corrected soon, which would entail at least a 20-30% drop from current prices.