A Top or The Top?

Since the S&P 500 bottomed in March 2009, there are 337 stocks that were part of the index then that still remain in it today. Of those 337, Amazon is one of 38 that has gained 1,000%. The stock has compounded at nearly 40% a year for the better part of the last decade, for a gain of 2,350%.

It is one of 25 companies to add $100 billion to its market cap.

Amazon has been one of the most important drivers of this bull market.

But that was then and this is now. Amazon is 25% off its highs, and in its fifth separate 20% drawdown since 2009…

…with all of its recent decline coming in October, this will be its worst month since November 2008.

So the question is, was this just a top, or the top?

It’s hard to compare Amazon in 2018 to Amazon in 2011 for a multitude of reasons, with perhaps size being the obvious one. In its last 20% decline (February 2016), the market cap was $227 billion. From its bottom in 2016 to the recent peak, it rocketed up 320%, and now, with its 25% decline over the last 40 sessions, it shed more market cap than the entire company was worth in 2016!

What’s also obviously different are interest rates. In February 2016, the 2-year treasury rate was 0.75%, today it’s 2.85%.

Another major difference between Amazon today and in previous drawdowns is that their core business growth is decelerating. Cooper Smith writes “Amazon’s core e-commerce business slowed to 11% year-over-year growth in Q3, down from 22% a year ago…Revenue from Amazon’s international business grew just 15% YoY, down from 28% a year ago.”

Maybe the simplest explanation here is the most likely one. The stock went, excuse me for a second, too far, too fast. At one point earlier in the year, Amazon added more in market cap than the combined value of Walmart Target and Costco. Even after this decline, it’s still up 32% in 2018.

Is today another opportunity to buy one of the most transformative companies ever at a discount, or are we staring at Cisco in 2000?

*Data from Ycharts and Bloomberg