Amazon’s Profit Outlook Improves

After falling to a 3-year low in January, Amazon.com (AMZN) rose to a 9-month high last week and is up +51% this year.  Amazon is rebounding from a long stretch of underperformance related to pandemic-era investments and a slowdown in growth following a surge in growth during the pandemic.  The outlook for Amazon has improved as investors are looking for an increase in earnings and growth prospects.

Even with its sharp rally this year, Amazon is still 32% below its July 2021 record high.  Other mega-cap technology stocks have fared better, with Apple (AAPL) and Nvidia (NVDA) trading at all-time highs.  Also, Microsoft (MSFT) is just below its record high, and Alphabet (GOOGL) is less than 18% away from its record.  Centre Asset Management said, “Amazon is the one FANG stock where we have a genuine overweighting, given the combination of a multiple that is well below its prior peaks along with the positive catalyst of margins inflecting higher, which in the past has marked periods of string outperformance.”

Amazon’s profitability has appeared to rebound, despite its slow sales growth.  After earnings plunged nearly -70% last year, analysts project earnings per share this year to jump +120%, boosted by severe cost cutting and multiple rounds of layoffs that reduced the company’s headcount by the most in its history.  According to Bloomberg data, the consensus for EPS this year has risen +5.3% over the past month and +18% in the past quarter.  However, in terms of revenue, the expected growth of 9.2% this year would be the slowest annual pace in Amazon’s history, though it is seen accelerating in each of the next three years, climbing to 13% in 2026.

With all the hype surrounding artificial intelligence (AI), investors are looking for a surge in growth in Amazon’s Web Services business (AWS) as AI drives more demand for cloud services.  UBS raised its price target on Amazon last week, saying an AI tailwind could show up in cloud results by the fourth quarter.  Overall, over 90% of analysts who cover Amazon recommend buying the stock, the highest ratio among mega-cap stocks.

The recent rally in Amazon has lifted its valuation to the most expensive of the FANG stocks based on price-to-earnings projections.  Amazon trades at 40 times profits expected over the next 12 months, down from a pandemic-era peak of 70 times but well above the Nasdaq 100 Stock Index ($IUXX) (QQQ) average of 26 times.  Catalyst Capital Advisors warns that Amazon’s growth outlook isn’t robust enough to justify the current valuation, saying “Amazon is a mature blue-chip company trading as though it has rapid growth ahead of it, when that rapid growth is in the past, and there’s only modest growth ahead.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.