Amazon Stock At A Make-Or-Break Level Ahead Of Q3 Earnings: Buy, Sell, Or Hold?

Summary:

• Amazon.com, Inc.’s Q3 2024 report could trigger a bullish breakout or confirm a bearish double-top pattern, with key resistance at $190-200 per share.
• Despite mixed Q2 results, AWS and Ads segments showed strong momentum, contributing significantly to Amazon’s operating income and future growth prospects.
• Today, consensus estimates for Q3 2024 project robust revenue and EPS growth sit at +9.9% y/y and +21.3% y/y, respectively.
• Given Amazon’s strong fundamentals, reasonable valuation, and attractive long-term risk/reward, I continue to rate Amazon stock a “Buy” ahead of its Q3 2024 report.

Introduction

Going into its Q3 2024 report on 31st October 2024, Amazon.com, Inc. (NASDAQ:AMZN) stock is trading at a key make-or-break level. On one hand, a positive quarterly report could trigger a powerful bullish breakout above multi-year resistance range of ~$190-200 per share. And, on the other hand, a rejection here could confirm a bearish double-top pattern that can culminate in a significant drawdown in AMZN stock.

Now, while it is impossible to gauge near-term risk-asset performance, we can always make an informed investment decision based on business fundamentals and long-term risk/reward. Henceforth, in today’s note, we shall preview Amazon’s upcoming report and re-evaluate AMZN stock using our proprietary process to see if it’s a buy/sell/hold ahead of its upcoming quarterly earnings report.

What Is The Earnings Forecast For Amazon?

In the Q2 2024 earning press release, Amazon’s leadership guided for Q3 2024 net sales to be in the range of $154-158.5B (growth of 8-11% y/y) and operating income of $11.5-15B.

Now, here’s what I said on this outlook in my Q2 earnings review:

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.

Since then, the Fed has cut rates by 50 bps, the US Unemployment rate has stabilized slightly under 4.2% (over recent readings), and retail sales growth has returned to positive growth. Furthermore, Amazon’s twin growth engine of AWS [cloud business] and Ads have showing strong momentum in recent quarters. Given continued economic resilience and AMZN management’s history of sandbagging guidance, I think Amazon is well-positioned to deliver a robust quarterly print later this week.

Now, before we look into consensus analyst estimates and revision trends for Amazon’s Q3 2024 revenue and EPS, let’s briefly review AMZN’s Q2 2024 earnings report to understand recent business trends.

How Was Amazon’s Previous Earning Report?

Amazon’s Q2 2024 headline results showed a mixed performance, with earnings beating expectations but revenues falling short of the consensus.

However, a look under the hood revealed a different story.

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.

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:

Source: Amazon: Fantastic Business At A Fair Price, Accumulate Slowly (emphasis added).

With consumers feeling the pinch of cumulative inflation of recent years, Amazon’s core e-commerce business saw slower y/y growth in domestic and international markets. However, Amazon’s twin growth engine of AWS and Ads continued 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.

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

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 has been picking back up in recent quarters. This is 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 (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.

– Andy Jassy, Amazon Q2 2024 Earnings.

As an AMZN shareholder, I am delighted with the ongoing re-acceleration in Amazon’s Cloud business, and hope to see more of the same in Q3 2024 results. 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.

Yes, 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. In my view, Amazon’s twin-growth engine is building momentum — pushing business fundamentals in the right direction. With all this information in mind, let’s review consensus estimates for Q3 2024 now.

Is AMZN Expected To Beat Earnings?

According to consensus estimates, Amazon is projected to deliver total revenues of $157.26B (+9.9% y/y) for Q3 2024, and the range of these estimates is from $156B-158.5B. With the consensus analyst estimate sitting ~$1B above the midpoint of management’s guidance range of $154-158.5B, Wall Street analysts are more bullish about Amazon’s business prospects than management’s guidance would suggest.

That said, with Amazon missing consensus revenue estimates last time around, analysts have been revising their Q3 revenue projections to the downside over the past three months, as reflected by 29 Down Revisions vs. 9 Up Revisions for Q3 2024 revenue.

As of today, the consensus analyst estimate for AMZN’s Q3 2024 revenue sits at $157.26B, a little more than $1B above the midpoint of management’s guidance range. Last quarter, this gap was $2B. Hence, I think it is fair to say that Wall Street is more bullish than Amazon’s management, but less bullish than it was heading into the last quarterly report.

Beyond Q3 2024, analysts expect Amazon’s sales growth to remain steady at around 10% y/y for the foreseeable future. As I see it, the recent revision trends aren’t ideal, but overall top-line projections still point to a healthy growth trajectory for Amazon.

On the earnings front, recent revision trends are also painting a mixed picture — with EPS projection for Q3 2024 down -0.96% from 3 months ago. However, Amazon is expected to record $1.14 per share of EPS this quarter as per today’s consensus estimate, which implies ~21.3% y/y EPS growth. While Amazon’s EPS growth rates are likely to remain lumpy in upcoming quarters, the margin expansion story for Amazon is far from over. The ongoing revenue mix shift towards AWS and Ads will likely continue to drive margins higher for a long time to come.

Based on recent business trends, management’s guidance, [somewhat more conservative] consensus estimates, and pre-earning revision trends, I expect to see a double beat from Amazon this quarter. That said, is AMZN stock a good buy ahead of earnings? Or, is this the right time to lock in some gains? Let’s find out!

Concluding Thoughts: Is AMZN Stock A Buy, Sell, or Hold Ahead of Q3 2024 Report?

Going into the Q3 2024 print, sell-side analysts remain bullish on AMZN stock, with 46 out of 48 analysts covering AMZN stock rating it a “Buy/Strong Buy” right now. With the average 12-month price target sitting at $224.14 per share, Amazon’s stock has a potential upside of 18%, according to Wall Street.

Using reasonable assumptions for future growth [5-year sales CAGR: 10%] and steady-state margins [optimized FCF margin: 20%] in our proprietary valuation model, we determined that AMZN’s fair value is ~$189 per share or ~$2.05T in market cap. With the stock trading at ~$189.16 per share, AMZN is fairly valued, and you know we couldn’t say the same thing about most of AMZN’s high-flying “Magnificent 7” big tech peers right now.

Predicting where a stock will trade in the short term is impossible; however, over the long run, a stock will track its business fundamentals and obey the immutable laws of money. If the interest rates were to return to artificially low levels (i.e., ZIRP), higher equity multiples would be justifiable. However, I work with the assumption that interest rates will eventually track the long-term average of ~5%. Inverting this number, we get a trading multiple of ~20x (P/FCF).

Assuming a base case exit multiple of 20x P/FCF, we get to a 5-year price target of ~$376 per share, which implies a CAGR return of ~15%.

With AMZN’s base case expected CAGR meeting my investment hurdle rate (of 15%) and handily exceeding long-term market (S&P 500) returns (of 8%-10% per year), I continue to view Amazon stock as an attractive long-term investment at current levels.

Technically, AMZN stock is finely balanced, with a big breakout or breakdown on the table. With Amazon’s stock holding above key short-term moving averages [10-week and 20-week MA], i.e., technical momentum is bullish going into the Q3 print. However, with weekly RSI and MACD rolling over, a strong rejection and pullback from here cannot be ruled out.

Furthermore, AMZN’s quant factor grades remain unsupportive for an imminent breakout, with an SA Quant score of 3.48/5. While I agree with these grades for Growth [A-], Profitability [A+], Momentum [B+], and Revisions [B+], the “Valuation” grade of “D-” seems too harsh. In my view, it is a reflection of Amazon’s earnings getting masked by a heavy CAPEX spending cycle which the tech giant is still in the process of exiting.

Considering AMZN’s fundamental, quantitative, valuation, and technical data, I don’t like it as a short-term earnings trade. However, for the long-run, AMZN is still an attractive investment at current levels.

Key Takeaway: I rate Amazon stock a modest “Buy” in the $180s-$190s.

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

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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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