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Why Amazon's share price just experienced a pullback

Although Amazon’s [AMZN] share price reached an all-time high in early September, the stock’s spike was short-lived.

At the start of 2020 Amazon’s share price hit a new peak, rising 17% from the start of the year to $2,185.10 during intraday trading on 19 February, before closing at $2,170.22.

On 12 March — the online retailer’s worst day of trading in 2020 — Amazon’s share price closed at $1,676.61 as the coronavirus pandemic started to affect the markets.

It didn’t take long for Amazon’s share price to recover its lost value as investors realised customers all over the world were increasingly relying on its delivery and streaming services in the wake of the pandemic.

Amazon’s share price closed at $2,168.87 on 13 April and went on to soar to record highs — its growth far exceeding that of major indices such as the S&P 500, the Dow Jones Index and the Nasdaq.

 

 

On 2 September, Amazon’s share price reached an intraday high of $3,552.25 before closing at $3,531.45 — the stock’s best ever day of trading. However, its stratospheric value didn’t last and over a seven-day trading period it fell 12.1% to close at $3,102.97 on 14 September.

The retail giant appeared to be one of the few stocks seeing growth despite COVID-19, so what caused this sudden decline in Amazon’s share price?

 

Why did Amazon’s share price plunge? 

Amazon’s share price was not the only one to suffer a downturn. The S&P 500, Dow Jones Index and Nasdaq all finished in the red on 3 September. However, Amazon was hit harder than any of them, losing $82bn off its market value in a single day.

The boom in retail trading this year has “played a big part in the frenzy, but investors say the size of many recent option purchases are far too big to be retail-driven”, according to the Financial Times. Because of the disparity, others are holding one company largely responsible for the drop — the “Nasdaq whale”, SoftBank [9984].

“SoftBank has bought stakes of almost $2bn in Amazon, Alphabet, Microsoft and Tesla — investments that are partially funded by cash from its $41bn asset sale programme that was triggered by a collapse in its share price during the COVID-19 market turmoil,” the publication recently reported, having seen the SEC filing from August.

“SoftBank has bought stakes of almost $2bn in Amazon, Alphabet, Microsoft and Tesla — investments that are partially funded by cash from its $41bn asset sale programme that was triggered by a collapse in its share price during the COVID-19 market turmoil” - Financial Times

 

The Japanese conglomerate’s spending spree has contributed to some of the massive rallies with US tech stocks, which may have inflated their valuations and ultimately led to a market correction as investors look to cash in on recent gains.

For Ryan Detrick, chief market strategist at LPL Financial, the sell-off is a mystery. “Although there is no single driver for the weakness, it seems as if investors all of a sudden realised how overbought stocks are and sold,” he told CNN Business.

However, Peter Cohan wrote in Forbes that “nothing has changed in the last two days to affect the financial prospects of the large-capitalization technology stocks that have driven the rise in the market. You should keep buying on this big dip”.

He added that “without real-time reporting on the specific trades of the largest volume traders and the reasons for those trades, nobody knows why stocks fell”.  

“Although there is no single driver for the weakness, it seems as if investors all of a sudden realised how overbought stocks are and sold” - Ryan Detrick, chief market strategist at LPL Financial

 

Will Amazon bounce back?

Addressing the wider market turmoil, Benjamin Rains, Zacks Equity Research editor, wrote that “investors should also remember that most of the recent economic data continues to point to a recovery”.

He pointed to the upcoming US election as the “next frontier for the market to navigate”.

Amazon has a consensus ranking of Hold on Zacks. The consensus among 47 analysts polled by CNN Money is to Buy the stock.

This rating is held by a wide majority of 40 analysts, with four suggesting to Hold the stock, two giving it an Outperform rating and one suggesting to Sell.

The median 12-month price target among 44 analysts is $3,700, with a high estimate of $4,200 and a low of $2,646. The median target represents a 19.2% increase from Amazon’s share price as of 14 September’s close.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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