Wealth Signals features commentary that filters out market "signals" from the "noise" that is the mainstream financial news media. We focus on what matters – which, invariably, is not what you’ll hear on CNBC or read in the Wall Street Journal. On the basis of these signals, we’ll also issue macro-driven trade ideas to get ahead of the trends and themes that will dictate market direction.
Andy Jassy didn’t mean to create the side hustle that pays Amazon’s (AMZN) bills.
All that Jassy, the current Amazon CEO – in 2003, a humble marketing manager – wanted to do was streamline the company’s growing e-commerce business.
And along the way, he “accidentally” launched one of the biggest business juggernauts of all time: Amazon’s cloud computing business, Amazon Web Services (AWS).
Back in the early 2000s, Amazon – at the time, a cash-hemorrhaging online bookseller – was launching a new product called “Marketplace”: an online shopping storefront that would help brick-and-mortar retail giants like Macy’s and Target expand into the online world.
The thing was, Marketplace required lots of extra bandwidth – more databases, servers, and computer processing power.
How to proceed with Marketplace was a topic during an Amazon executive retreat in 2003 at the Beverly Hills home of then-CEO Jeff Bezos. And the discussion created the Eureka moment, as Jassy explained later at an AWS “re:Invent” conference:
“We realized we could contribute all of those key components of that internet operating system, and with that we went to pursue this much broader mission, which is AWS today, which is really to allow any organization or company or any developer to run their technology applications on top of our technology infrastructure platform.”
In other words... by creating a “one-stop shop” Internet infrastructure business, Amazon could solve problems for companies everywhere. It would save companies the cost of buying hardware and software, and of upgrading, because Amazon could do it for them.
Thus was born AWS.
And it was a fast-growing baby. Since the company began breaking out AWS numbers in 2013, the unit’s revenue has swelled more than 25 times, to $80 billion. And since 2000, when the company first launched its infrastructure division, Amazon’s overall operating margins have doubled, to 44%.
In 2020, Amazon’s market cap breached the $1 trillion mark… thanks in no small part to AWS, the profit engine of the behemoth that is Amazon (AWS actually subsidizes the retail business).
Fast forward to 2022, when the shares of Amazon – like those of most other tech companies – took a beating, as investors worried about the impact of higher interest rates. Shares of Amazon fell 50%, reminiscent of the drop suffered by technology darlings Microsoft (MSFT), Cisco (CSCO), and Intel (INTC) during the dotcom bust in the early 2000’s.
But yesterday’s catastrophe is today’s opportunity.
And as we’re about to show you, the powerful “Golden Cross” signal recently indicated the investing momentum has shifted from selling to buying once more.
And we see an opportunity to profit…
The Last Time Our Indicator Was Triggered
In 2020 and 2021, Amazon was firing on all cylinders.
Like companies focused on food delivery and face masks, AWS had a good pandemic. With hundreds of companies suddenly needing to operate on a remote basis, demand for cloud services shot through the roof.
AWS has 33% of the global market share of cloud computing, with its closest competitor, Microsoft’s Azure, at around 20%. And from the end of 2019 through the end of 2021, AWS’s revenue almost doubled to $62.2 billion.
Wall Street anticipated the surge in demand. As big money managers were snapping up shares, they triggered an important trading signal that indicated a big rally was ahead.
The golden-cross formation is when the 50-day moving average (“DMA”) for a stock’s price moves through its 200 DMA to the upside. The 50-day (short-term) measures the average stock price over the stated time – while the 200-day (long-term) does the same.
When the 50 DMA (the blue line on the graph below) moves above that of the 200 DMA (the yellow line), it’s time to take notice. The shift is a signal that investor demand for a stock is rising, and momentum has turned higher. Look at the following chart of Amazon shares to see what I mean…
The red circle highlights the last time Amazon’s 50 DMA rose through its 200 DMA, in early February 2020. That was shortly before much of the world’s office-dwelling population went home en masse due to Covid.
At the time, the stock was around $102. Seven months later, in early September, the shares were up 73% to $177. And by the peak in July 2021, they had risen as much as 80% to $188.57.
A Dip… And A New Cross Signal
But, by late 2021, investors were worried that interest rate hikes from the Federal Reserve were right around the corner. That would mean higher borrowing costs and slowing demand… and a dent in profits for big-borrowing big tech. Fund managers sold AMZN shares.
Look at Amazon’s changing ownership dynamic to see what I mean. In July 2021, domestic asset managers held roughly 65% of the shares outstanding. By the time the stock bottomed at the end of 2022, the ownership percentage of institutional investors had dropped to 59%.
That’s one of the lowest levels ever, based on records going back to 2010. That means there is plenty of room for institutional investors to increase exposure to the stock.
And today, we’re seeing another golden cross setup in AMZN, similar to the one in 2019…
As you can see in the above chart, in late May, the 50 DMA for Amazon crossed through the 200 DMA to the upside.
That’s a signal that momentum has shifted. It tells us investors are starting to snap up the company’s shares once more.
Rebounding Share Demand
As of the end of May, the percentage of Amazon’s shares held by domestic asset managers hadn’t changed much compared to December. That means today, there’s plenty of room for mutual and hedge funds to up their investment.
There are two reasons why we think investors will increase their AMZN stakes in the near future...
First, AWS cloud services offer more potential for businesses to improve efficiency and make more money. With an economic slowdown looming, these solutions will be in higher demand. And second, artificial intelligence (AI) – with its never-ending need for data – will drive increased demand for server space.
This could propel Amazon shares to new all-time highs over the next twelve months. Here are two ways to take advantage of Amazon’s strong prospects – an aggressive trade and a conservative one.
Trade Opportunity #1
First, investors with a high risk tolerance can buy shares of Amazon (NASDAQ: AMZN). We recommend purchasing them at a buy-up-to price of $130 (compared to $124.25 as of Thursday’s close), with a trailing stop of 25%.
That means that you should intend to sell the shares, at the latest, when they’re 25% below the highest price achieved since your purchase.
Trade Opportunity #2
Income-seeking investors may be interested in the Amazon 4.55% 2027 senior notes (CUSIP: 023135CP9). We recommend purchasing these bonds with a “buy up to” price of $1015 per bond and a trailing stop of 20%.
Note for Porter & Co. Distressed Investing subscribers: For clarity – and for newer readers – we’ve chosen to write out the full bond price in dollars.
Please note, the price in the chart shows the bond’s value relative to par or $100. However, the cost of each bond is currently around $1,001, and the minimum purchase amount is two bonds, or a bit over $2,000.
The bond was issued in November 2022. It will mature in December 2027. Its first coupon payment was made on June 1, 2023, and it pays out every six months until maturation. Based on the current price, it’s yielding right around 4.5%. That’s better than the 4.2% and 3.9% yield, respectively, on 3- and 5-year U.S. Treasuries. (For details on how to buy the bond, see our appendix.)
Because we’re purchasing the bond after its first coupon payment was made, we will not collect the full payment due in December. The seller will be owed – by the buyer – the accrued interest from June 1, through the date they sold the security.
However, this is all part of the purchase and settlement process. So, on December 1, you will receive the full payment.
Since this is a senior note, it would take precedence over junior bonds in the event of a corporate bankruptcy. We do not anticipate bankruptcy for Amazon, so this should be a non-issue.
The note is rated AA by Standard & Poor’s, A1 by Moody’s, and AA- by Fitch. We’d be more worried about the bond being called by the company before they mature, once interest rates start to drop.
So, for investors seeking the safety of steady income without a lot of risk, we think this is an excellent way to add stability to your portfolio. It’s also an excellent time to lock in yield.
Porter & Co.
We’ve put together a set of detailed instructions on how and where to buy this Amazon bond. You can view the full “How to Buy Amazon Bonds” guide here.