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Amazon’s (AMZN) stock has struggled since peaking in early September — those struggles may grow even worse. The stock finds itself not only overvalued on a historical basis, but it confronts complicated technical patterns and bearish options betting. This suggests that Amazon’s stock likely faces an even steeper decline in the months ahead.

The biggest problem Amazon’s stock may face is a vaccine for COVID. Make no mistake; a vaccine is good news for all humans and even Amazon as a company. Amazon’s stock, on the other hand, is a different story. The shares have received a boost due to this “stay-at-home” trade, which has been in place since late March.

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Amazon has seen explosive growth over the past twelve months, with revenue rising to $363.3 billion on a trailing twelve-month basis. That revenue is expected to rise to around $380 billion by the end of 2020, a growth of 35%. That growth is expected to decelerate in 2021 to around 18.3%, followed by slower growth in 2022 of 16.4%.

It leaves the stock trading with a price to sales multiple of 3.5 times 2021 sales estimates and towards the upper end of its historical range. Since 2000, the stock has only traded at a valuation this high one other time. Over that time, the stock has averaged a one-year forward price to sales ratio, nearly half its current ratio, around 1.98.

It does not get better when looking at that average multiple when you move into later years. Since 2012, the stock has traded with an average sales multiple of 2.12, and since 2017 at 2.76. In fact, at the end of 2019 and the beginning of 2020, the stock was trading with a multiple around 2.6. It shows how much of a boost the stock has gained due to the stay-at-home trade.

Even when looking at Amazon on free-cash-flow yield, it is trading at the lower end of its historical range. When the yield has fallen this low, it is typically associated with a top in the stock, such as in 2013, 2015, 2018, and 2020.

Betting Shares Fall

The steep valuation could be one reason the stock is likely to struggle and why some traders bet the shares fall. There was a rather sizeable bearish bet placed against Amazon on November 11; I first mentioned this trade in my marketplace service on November 12. The open interest levels for January 15 $3,050 strike price for the puts and calls, both increased by around 2,500 contracts each.

The data shows that the calls were SOLD for $235.20 per contract. Additionally, the puts were BOUGHT $150.20. It means that the trader took an overall premium of about $85 per contract. Still, this suggests that Amazon is trading below $3,050 by the expiration date. Currently, Amazon is trading around $3,100.

It happens to be a very risky bet, as the trader could see the value of the puts go to $0, while the stock price could continue to rise, pushing the value of the calls up. It is the same concept as being short the stock.

It is also possible that the trader owns the stock and is writing covered calls and merely buying the puts to cover downside risk.

Still, this is someone that clearly thinks or has the fear the shares are heading lower, and for our purposes, that matters most.

Weak Technicals

The technical chart remains very weak and has several bearish patterns, from a potential double top to an RSI that trending lower. Overall, the stock has decent support around $2,870, and if that level holds, the stock probably continues to consolidate sideways. If $2,870 breaks, we could start to think about $2,670 or even $2,460.

The RSI is really telling the story, and it is one of a stock that has momentum leaving. The stock is not even oversold yet, with an RSI around 46. It would need to drop below 30 for it hit oversold levels.

Overall, the risks are running high with Amazon, and if the stay-at-home trade suffers, so too will this stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future results.