Amazon: Fantastic Business At A Fair Price, Accumulate Slowly

Summary:

• Amazon’s Q2 2024 headline results showed a mixed performance, with earnings beating expectations but revenues falling short of consensus numbers. However, a look under the hood reveals a different story.
• Despite recent stock volatility, Amazon’s robust business fundamentals and long-term growth prospects render AMZN stock a “Buy”.
• As per TQI’s Valuation Model, Amazon’s stock is trading at a 10% discount to its fair value, and investors could generate a 5-year CAGR of 17% from current levels.
• While technical analysis suggests further near-term downside, slow, staggered accumulation over 12–24 months appears to be the optimal path forward for long-term investors.

Introduction

Since reporting its Q2 2024 results in early August, Amazon.com, Inc. (NASDAQ:AMZN) has seen its stock whipsaw quite a bit over the past month or so — tanking from the high $180s to the low $150s only to snapback to the low $180s in a vicious rally before moderating back down to the $170s:

Now, in my Q2 earnings preview, I rated Amazon a “Buy” due to its robust business fundamentals and favorable long-term risk/reward, despite acknowledging the possibility of a deeper pullback:

Technically, AMZN stock is still holding above key short-term moving averages [10-week and 20-week MA], i.e., momentum is intact. However, with weekly RSI and MACD rolling over, a deeper pullback cannot be ruled out.

In today’s note, we will review Amazon’s recent business performance and reevaluate its valuation and technicals to formulate an informed investment decision on the technology conglomerate.

How Did Amazon Fare In Q2 2024?

For Q2 2024, Amazon reported a mixed quarter, with earnings topping street expectations but revenues falling short of estimates:

Now, heading into AMZN’s Q2 report, consensus analyst estimates were sitting well above management’s guidance for quarterly revenues, $2B above the mid-point of the guided range, to be precise.

According to consensus estimates, Amazon is projected to deliver total revenues of $148.72B (+10.7% y/y) for Q2 2024, and the range of these estimates is from $146.53B-151.18B. With the lower end of analyst estimates above the midpoint of management’s guidance range of $144-149B, Wall Street analysts are clearly more bullish about Amazon’s business prospects than management’s guidance would suggest.

With Amazon’s management guiding below Street estimates last time around, analysts have been scrambling to adjust their revenue forecasts over the past three months, as reflected by 33 Down Revisions vs. 3 Up Revisions for Q2 2024 revenue. Interestingly, the revision trends look pretty stable.

As of today, the consensus analyst estimate for AMZN’s Q2 revenue sits at $148.72B, a little more than $2B above the midpoint of management’s guidance range. Beyond Q2, analysts expect Amazon’s sales growth to remain steady above 10% for the foreseeable future.

Source: Up 20% In 6 Months, Is Amazon A Buy Ahead Of Q2 Earnings?

Hence, while Amazon failed to beat consensus top-line estimates last quarter, the business still delivered solid results – with the continuation of growth re-acceleration at AWS to +19% y/y serving as the key highlight of the report:

Here’s what Andy Jassy (Amazon’s CEO) had to say about this report (emphasis added):

We’re continuing to make progress on a number of dimensions, but perhaps none more so than the continued reacceleration in AWS growth. As companies continue to modernize their infrastructure and move to the cloud, while also leveraging new Generative AI opportunities, AWS continues to be customers’ top choice as we have much broader functionality, superior security and operational performance, a larger partner ecosystem, and AI capabilities like SageMaker for model builders, Bedrock for those leveraging frontier models, Trainium for those where the cost of compute for training and inference matters, and Q for those wanting the most capable GenAI assistant for not just coding, but also software development and business integration.

Source: Amazon Q2 2024 Earnings Release.

With consumers feeling the pinch of cumulative inflation of recent years, Amazon’s core e-commerce business is seeing slower growth in domestic and international markets. However, Amazon’s twin growth engine of AWS and Ads is still exhibiting strong momentum, growing 19% y/y and 20% y/y, respectively, in Q2 2024.

As we have discussed in the past, Amazon’s Cloud business – AWS – is central to the investment case for AMZN, given its outsized contribution to profits!

With AWS contributing nearly ~61% of Amazon’s operating income in Q1, the importance of Amazon’s cloud business cannot be understated. For a while now, the market narrative has been that Microsoft Azure (MSFT) is the big winner among cloud hyperscalers in the era of GenAI; however, Amazon’s cloud business expanding faster than Microsoft in dollar terms is a sign that AWS can defend its market share, and stay the leading hyperscaler in the future!

For Q2, Microsoft has already reported growth deceleration for Azure Cloud, and so, if Amazon were to report further acceleration in AWS growth rates later tonight, I think we could see a good bit of capital moving away from MSFT to AMZN stock in the near future. Amazon is the leading hyperscaler, and as a long-term investor, I want this to be the case over the long run. We’ll see if this data point turns into a trend in the next few quarters.

During Q2’24, Amazon’s operating income increased to +$14.7B, and AWS contributed ~63.2%, i.e., $9.3B. Despite running at an annualized ARR of $105B+ [humongous scale], AWS’ growth is picking back up as customers reach the end of a cost-optimization cycle and continue to invest in new GenAI solutions, according to management commentary on the Q2 earnings conference call. As an investor, I am delighted with AWS numbers.

Now, Amazon’s Ads segment growth moderated to +20% y/y in Q2; however, the Ads business has a long runway for growth, with video advertising still in the nascent stages.

With Amazon producing $53B in free cash flow over the past twelve months, any remaining doubts around Amazon’s profit-generation potential have been quelled. And given the continued revenue mix shift towards faster-growing, higher-margin AWS [cloud] and Ads businesses, I think Amazon’s cash flows and profits are set to rise significantly in upcoming years.

What’s Next For Amazon?

For Q3 2024, Amazon’s management has guided for net sales of $154-158.5B (growth of 8-11% y/y) and operating income of $11.5-15B.

With the unemployment rate creeping up, and the treasury yield curve set to uninvert, the fears of an imminent recession are rising. However, the Fed is all set to embark on a rate-cutting cycle, and lower interest rates could support a flailing consumer and motivate aggressive business spending. The prevailing market conditions are filled with uncertainties, but as long as economic resilience persists, given its management’s history of sandbagging guidance, Amazon will likely continue to deliver robust business performance in the next quarter and beyond.

Concluding Thoughts: Is AMZN Stock A Buy, Sell, or Hold?

Using conservative assumptions for future growth rates and optimized FCF margins, TQI’s fair value estimate for AMZN stock came out to be ~$189 per share (or $2.05T). With AMZN trading at ~$171 per share, Amazon is trading at a sizeable [10%+] discount right now – unlike most of its high-flying “Magnificent 7” big tech peers.

Furthermore, assuming a base case exit multiple of 20x P/FCF, I see Amazon’s stock price rising from ~$171 to ~$376 per share at a CAGR rate of ~17% over the next five years.

Since Amazon’s 5-year expected CAGR return is greater than our investment hurdle of 15% and S&P 500’s (SPY) long-term annual return of 8-10%, AMZN stock remains a long-term “Buy” under our valuation process (especially since our model does not consider buybacks/dividends, which are only a matter of time given Amazon’s rapidly-rising free cash flows).

In the absence of a severe economic downturn, Amazon’s business momentum will likely continue unabated in upcoming quarters, with AWS and Ads serving as the key pillars of profitable growth at the technology behemoth. Now, from a long-term risk/reward standpoint, Amazon stock is looking attractive at current levels. As such, I continue to view AMZN as a “Buy” for long-term investors.

From a technical standpoint, Amazon stock has lost momentum in recently, and last week’s bearish rejection of the 10-week and 20-week moving averages points to further near-term downside.

Based on Fibonacci levels, I see the $114-151 range as a possible target box for this ongoing correction. In the event of a hard landing, an even deeper drawdown could materialize, but I would become an aggressive accumulator if AMZN were to get down to the low-to-mid-$100s.

Considering business fundamentals, valuations, and technicals, I like the idea of slow, staggered accumulation over 12-24 months for Amazon.

Key Takeaway: I continue to rate Amazon.com, Inc. stock a “Buy” in the $170s, with a strong preference for slow, staggered accumulation.

Thank you for reading, and happy investing! Please share any questions, thoughts, and/or concerns in the comments section below.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of AMZN either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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