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The earnings season for “Magnificent 7” stocks is looking strong. It began on a stellar note with Tesla (TSLA), whose CEO Elon Musk’s upbeat commentary on the company’s outlook helped the stock record its best day in over a decade. Alphabet (GOOG) is also trading sharply higher ahead of the bell today after the company reported an impressive set of numbers for Q3.
Tomorrow, we have Q3 reports lined up from Amazon (AMZN) and Apple (AAPL). The mega-cap tech giants are stepping into the confessional at a time when the Nasdaq Composite ($NASX) has hit record highs, breaching its July peak.
Amazon, conversely, hasn’t been able to break above its July highs, and the company’s Q2 earnings – where it not only missed top-line estimates, but also guided below Street forecasts – didn't help matters. Can the company set the narrative back on course with its Q3 earnings and rise to record highs, or will it be another horror show like Q2? We’ll discuss in this article, beginning with Amazon's Q3 earnings preview.
Amazon Q3 2024 Earnings Preview
Analysts expect Amazon’s Q3 revenues to rise 9.9% YoY to $157.4 billion. During the Q2 call, Amazon forecast Q3 revenues between $154 billion and $158.5 billion, which—at the midpoint—arrived below the $158.2 billion that analysts were then modeling. Analysts’ estimates imply Amazon’s top-line growth hitting multi-quarter lows.
Brokerages aren't too bullish on the Q4 outlook, either, and consensus estimates call for single-digit revenue growth. Meanwhile, the e-commerce giant’s bottom-line growth is expected to stay strong, with analysts expecting a 34% YoY rise in both Q3 and Q4.
What to Watch in Amazon’s Q3 Earnings
Like its fellow Big Tech companies, Amazon needs to reassure markets about both its short-term as well as long-term outlook. Here’s what I will watch for in the company’s Q3 earnings release.
Revenue guidance: Amazon has guided below Street estimates for three consecutive quarters, predominantly due to lackluster growth in its e-commerce operations. While analysts have tepid expectations from Q4 guidance, failure to meet even these might not go down well with markets.
Margin expansion: While Amazon’s top-line growth has slowed, it impressed markets with strong margin expansion led by aggressive cost cuts. During the Q3 earnings call, I will watch for management comments on margin expansion in 2025, as the “efficiency” story has nearly lived its course for all Big Tech companies.
Long-term projects: Like its Magnificent 7 peers, Amazon is also investing aggressively in artificial intelligence (AI). During Amazon’s Q3 earnings call, markets would like to hear more about AI monetization. Also, the company might talk about its Kupier satellite project, which will compete with Musk’s Starlink in providing broadband access.
Amazon Stock Forecast
For the last couple of years, Amazon has been a “top pick” for many brokerages. Things are not much different ahead of the company's Q3 confessional, and JPMorgan and Stifel are among the brokerages that have listed the stock as a top pick.
However, Amazon got a rare downgrade ahead of the Q3 print when Wells Fargo analyst Ken Gawrelski lowered his rating by one notch to “equal weight.” Importantly, he cut his target price to a Street low of $183, which is below where the stock currently trades.
Gawrelski sees multiple headwinds for Amazon. First, while Gawrelski believes that the company’s retail margins in North America – its biggest segment by revenues – will eventually reach double digits, he warned that the progression won’t be linear. The Wells Fargo analyst said that the “consensus likely became a bit exuberant in our extrapolation of margin expansion trends in 2023 and early '24 to '25 and beyond forecasts.”
Gawrelski also sees pressure in the company’s fast-growing digital advertising business, as well as the Fulfillment by Amazon (or FBA) logistics business, where he believes pricing power might be constrained by Walmart's (WMT) presence in that market.
Overall, sell-side analysts remain upbeat on Amazon’s outlook, and it has a consensus rating of “Strong Buy” from the 48 analysts in coverage, with the mean target price of $226 an 18.4% premium to Tuesday's closing prices.
Should You Buy AMZN Stock Ahead of Q3 Earnings?
Given the more realistic estimates for Amazon’s Q3 earnings and the relatively grounded price action ahead of the print, I don’t expect a horror show like Q2. Conversely, if the company can come up with better-than-expected Q4 guidance and reassure markets about the return on investment (ROI) from its AI and other long-term projects, record highs could be in sight for AMZN stock.
All things considered, Amazon is among those Big Tech names that still have a lot of runway for growth. While revenue growth is expected to dip to high single digits in the back half of the year, it has the potential to deliver double-digit topline growth for the next several years, given its presence in multiple high-growth industries.
In terms of valuation, AMZN trades at a next 12-month (NTM) price-to-earnings (PE) multiple of around 37x, which doesn't look too demanding, considering the company’s growth potential. No wonder, then, that Amazon has been the favorite “top pick” for brokerages this year.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , TSLA , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
