Upcoming Amazon's Q3 Earnings: Is it a buy?

Oct.19,2024, 09:20PM PT, by: StockHawk (origin link)

Amazon is scheduled to announce its third-quarter financial results on October 31, 2024. I have been optimistic about AMZN stock since 2016, and I anticipate another positive quarter for the company. In this article, I will examine Wall Street's expectations for Q3, review recent analyst rating changes, assess potential headwinds and tailwinds, identify key risks, and conclude with my price target prediction.

Q2 reflection

Wall Street had high hopes for the return of AI investments among the Magnificent 7 during the second quarter. Unfortunately, many companies, including Microsoft, Google, and Amazon, fell short of these expectations. Amazon's Q2 earnings report was a mixed bag, with revenue narrowly missing Wall Street estimates at $147.98 billion (compared to expectations of $148.56 billion) and weak guidance for the third quarter sending shares down in after-hours trading.

One of the primary reasons for Amazon's revenue shortfall was continued cautious spending by North American customers, who were opting for cheaper products. Additionally, the company's increased spending on data center expansion and AI chips, exceeding $6 billion, raised concerns about potential pressure on operating margins.

Despite the mixed Q2 results, AMZN stock rebounded from a post-earnings low of $160 to reach $193 in September.

Q3 expectations

According to TipRanks, Amazon's bullish sentiment remains strong, with 88 analysts maintaining buy ratings in September. While the number of hold ratings increased slightly from 1 to 3 during the last quarter, the overall outlook for AMZN remains positive.

Analysts are expecting Amazon to report earnings of $1.14 per share for Q3, with a range of $0.94 to $1.28. Additionally, they foresee sales of $157.24 billion, falling within a range of $156.05 billion to $159.15 billion.

Amazon's official guidance for Q3 is a bit of conservative. The company expects revenue to range between $154.0 billion and $158.5 billion, with operating income estimated to be between $11.5 billion and $15.0 billion. This compares favorably to the $11.2 billion in operating income reported in the third quarter of 2023.

From tipranks.com

Why am I bullish

Amazon's future appears bright, driven by several key factors. First, Amazon Web Services (AWS) continues to expand its reach through strategic partnerships, such as the recent agreement with Oracle to deploy its cloud infrastructure on AWS data centers. This partnership is a testament to AWS's growing appeal among large enterprises seeking reliable and scalable cloud solutions. Moreover, AWS's leadership in generative AI, with offerings ranging from training and inference chips to software and services like Bedrock and Q*, is fueling increased adoption of these innovative technologies.

Second, Amazon's sales growth remains strong in both North America and international markets. The company's overprovisioned fulfillment centers, built during the COVID-19 pandemic, are now being utilized effectively, contributing to this robust growth. Additionally, the federal government's interest rate cuts are stimulating consumer spending in North America and boosting international revenue due to the weaker US dollar. This favorable economic environment is expected to continue as interest rates remain low.

Finally, Amazon's advertisement revenue is on a steady upward trajectory. Prime Video, with its massive global subscriber base of over 220 million, provides a powerful platform for advertising. The service's agreements for live sports events and increased commercial ads frequency are further driving the growth of advertising revenue.

In conclusion, these factors collectively paint a positive picture for Amazon's future. The company's strategic partnerships, technological advancements, strong sales growth, and expanding advertising opportunities position it well for continued success.

Headwinds and risks

While Amazon's future appears promising, it's important to acknowledge the potential headwinds and risks associated with its business. One such risk, as highlighted by Wells Fargo analysts, is the escalating cost of the Kuiper project. Initial estimates pegged the project cost at $10 billion four years ago; however, recent projections suggest a significantly higher figure ranging from $16.5 billion to $20 billion.

While this increased cost is a legitimate concern, it's essential to consider the project's timeline. According to the FCC, the capital expenditures (CapEx) for Kuiper will be spread out over the next five years, culminating in July 2029. This staggered approach allows for a more manageable allocation of costs, particularly when viewed in relation to Amazon's substantial yearly operating income.

Price Target and Conclusion

Predicting short-term stock prices can be challenging due to various factors. Based on my analysis of Amazon's current business conditions, I believe the stock has the potential to reach a short-term price target of $200. Looking further ahead, I anticipate a one-year target of $240.

For the longer term, I have a more ambitious prediction. I believe Amazon's stock could double in value to $370 by the end of 2027. This prediction is based on the company's strong fundamentals, innovative initiatives, and continued growth in key areas. **please do your due diligence, prior to placing order ** 🙂.