Amazon could continue to fall, this portfolio manager says

Fans of Amazon (Amazon Stock Quote, Chart AMZN:NASDAQ) can thank their stars that a dreary month of October is now over and done with, but with the stock down 18 per cent from its early September high, has Amazon hit bargain territory?

That’s a firm maybe, says David Driscoll of Liberty International Investment Management, who warns that a further drop in share price is not out of the question.

Like the rest of the FAANG stocks and along with the tech sector in general, Amazon saw its share price tumble over the past few weeks, by Tuesday of last week falling 28 per cent off its 12-month high set on September 4.

Amazon’s third-quarter earnings report, delivered on October 25, didn’t help matters, as both revenue and guidance came out lower than expected. The e-commerce giant missed the consensus estimate on revenue, coming in at $56.6 billion versus the expected $57.10 million, while beating analysts’ expectations on earnings, generating EPS of $5.75 per share versus the expected $3.14 per share. (All figures in US dollars.) Further, the company’s fourth-quarter revenue guidance projected in the range of $66.5 billion and $72.5 billion, notably below the consensus $73.9 billion, and enough to drag the stock down ten per cent overnight.

But it’s unclear whether the pullback is over, says Driscoll, CEO and president of Liberty International, to BNN Bloomberg.

“When you look at the FAANG stocks over the month of October, it’s been Facebook, Google and Amazon that have fallen the most,” Driscoll says. “You can see the wild swings. Amazon at one point was trading at around 135x earnings and everybody said, ‘Don’t worry about the earnings, they’re taking over the world right now.’ To that point, that’s where the opportunity is.”

“Online stores revenue growing 11 per cent, 17 Amazon websites globally, [but] they’re trying to push outside of the United States and it’s been a little tougher because there are other rivals out there in the space,” he says. “They’re also getting competition on AWS, mostly from Microsoft’s Azure, and then of course the IBM acquisition of Red Hat this week, that’s also another push into the cloud.”

Of the FAANG stocks over the month of October, Amazon finished down 21 per cent, Netflix dropped 20 per cent, Google fell ten per cent, Facebook dropped seven per cent and Apple was down four per cent.

Driscoll advises investors keen to jump into Amazon for the first time to start with a half-position.

“As far as Amazon is concerned, be careful —it could easily go back another 30 per cent on top of where we are now,” Driscoll says. “If you really want to own it, then half-position on it.”

“This is where portfolio management comes into play. You have to have discipline,” he says. “If it’s a first purchase, I have no problem with that. Half a position only, though. Say you’ve got $10,000 to invest in one stock, buy $5,000 and sit back. If it comes back and doubles, you don’t have to buy any more. If it comes down, then you have the other $5,000 to deal with.”

Disclosure: Nick Waddell and Jayson MacLean of Cantech Letter own shares of Amazon.