Amazon 'has never been stronger.' So why isn't its stock getting more love?

Dow Jones10-30 18:00

MW Amazon 'has never been stronger.' So why isn't its stock getting more love?

By Emily Bary

Amazon's stock has trailed the S&P 500 over the past three months, owing in part to concerns about operating income and margin compression. Will Thursday's earnings alleviate fears?

In the view of Bernstein analyst Mark Shmulik, Amazon.com Inc. "has never been stronger."

Yet the stock has become less crowded in recent months, he noted. It's up 4% over the past three months, trailing the S&P 500's SPX 7% gain, and it got beaten out by four members of the "Magnificent Seven" over that span.

Wall Street found things to dislike in Amazon's $(AMZN)$ last earnings report, including margin compression in the North America retail business as well as underwhelming advertising revenue, according to Shmulik. Investors also worried about consumer-spending pressure.

But he sees many other reasons for optimism. For example, Amazon's advertising business seems to be gaining more momentum, inbound inventory services could be due for an uptick ahead of the holidays and AWS cloud-computing growth should continue to "hum along."

There are so many positives to Amazon's story that Shmulik made a reference to a Louis C.K. bit ahead of the company's third-quarter earnings report on Thursday afternoon: "Everything is amazing, and nobody's happy."

See also: Microsoft's earnings are about to look pretty weird. Here's what to know.

Admittedly, Amazon's stock has done better over a longer span. Up 26% so far this year, it's beaten the S&P 500 and all but two members of the "Magnificent Seven."

Shmulik acknowledges that but says Amazon shares are still "being held back by investors turning over the next rock of worry."

That could mean an attractive setup heading into earnings. "With somewhat reset expectations we believe there's room this quarter for Amazon to surprise to the upside on top and bottom line, led by rebounding strength in the ad business and unknown cost savings to offset the laundry list of headwinds we've all compiled intra-quarter."

Extra positives could be a meaningful update on capital returns or a better breakout of strategic investments, he added.

Read: How Microsoft's dividend hike and new $60 billion buyback program stack up

Jefferies analyst Brent Thill, however, took a more measured view, flagging the stock's year-to-date outperformance as he called the earnings setup "somewhat demanding."

Deutsche Bank analyst Lee Horowitz wrote recently that Amazon was likely to forecast operating income for the fourth quarter below analysts' expectations. He sees "expectations that are likely too aggressive in underwriting in [gross-profit-per-unit] growth," meaning Amazon could make $16 billion at the top end of guidance for this metric.

"That said, given ongoing acceleration at AWS and stable at [worst] advertising revenue growth as Thursday Night Football benefits from strong upfront commitments, we believe...buy-side bogeys of closer $16.5 billion in the 4Q to be achievable," he wrote.

In that sense, he recommended that investors "buy the potential dip" in the event shares sell off after the report.

Jefferies' Thill agreed that margin concerns could be overstated.

"We see no new step function change in [margin] headwinds," he wrote. "Consumer trade-down has been ongoing, and recent data indicates better consumer health. There are more logistics efficiency gains ahead, offsetting wage inflation, and [high-margin] AWS and ads continue to outgrow retail."

Analysts tracked by FactSet expect overall revenue of $157.3 billion for the third quarter, up from $143.1 billion a year prior. The FactSet consensus also models $1.14 in earnings per share, up from 94 cents a year before.

-Emily Bary

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October 30, 2024 06:00 ET (10:00 GMT)

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