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Amazon sale? Should I buy shares now?

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On 9 July, the Amazon (NASDAQ: AMZN) share price hit an all-time high of $3,719. Twenty days later, the company posted its second-quarter earnings report, pouring water on the fire. The share price quickly fell over 10% to $3,320 today. However, I think investors have been too hasty in their Amazon sale. With a market capitalisation of $1.66trn, it’s still the largest e-commerce company in the world. Its founder, Jeff Bezos, is the richest person in the world.

I already own shares in the company, as part of my personal investment strategy. Is this dip the right time to average down my share cost, or could there be an even better re-entry point?

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The Amazon sale

Amazon released its second-quarter earnings report on 29 July. My interpretation of the report is that the share price high of $3,719 was based on investor speculation that sales would continue to rise as rapidly as they did during the pandemic boom. Sales rose 27% to $113.1bn, but this was between $2bn to $6bn behind analyst expectations.

For over a year, high street shopping across the Western world was severely curtailed. With 75% of adults in the UK now fully vaccinated, and the EU and US not far behind, the safe reopening of physical stores seems to be having an impact on Amazon’s revenue. The company predicts a rise in Amazon sales of between 10% and 16% in Q3, far behind the 27% increase seen in the same quarter last year. I think this prediction partly explains the share price fall. On the other hand, consumers who have become used to online shopping could have a long-term positive effect on revenue.

With a price-to-earnings ratio (P/E) of 58, investors clearly see the potential for long-term future growth. However, with a stock like Amazon, this high value could also be driven by sentiment rather than raw numbers. And sentiment can be fickle. An elevated P/E ratio leaves plenty of room for a further fall. If Q3 earnings do not beat expectations, there could be another Amazon sale. 

The long-term investor

As an Amazon shareholder, I’m planning to keep my shares in my ISA until retirement. I think that taking a long-term view over the next 30 years, the company’s share price will continue to rise. The current dip represents a good opportunity to increase my position and bring my average purchase price down.

I’m a long-term investor. The stock IPO back in 1997 valued each share at $18. If I’d invested £100 in the company then, after stock splits my investment would now be worth over £150,000. That’s the kind of long-term performance that gives shareholders like me long-term confidence.

Like any investor, I want to get as many shares as I can for my money. The question is whether the share price has further to fall, or whether it will recover before Q3 earnings are released. The company’s financial history indicates that the share price briefly fell back to the $3,000 mark three times in the last 12 months, most recently in March. With earnings set to falter, I think it could fall to this level. However, if I wait too long, I might miss the Amazon sale dip. And there’s no guarantee a price point this attractive will arise again.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Archer owns shares of Amazon. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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