E-commerce giant Amazon’s (AMZN) mixed results for the second quarter did not deter investors from scooping up its shares. Despite facing setbacks due to inflation in Q2, Amazon seems to have strong and unavoidable upsides.
Following the result, Amazon enjoyed a slew of Buy ratings from Wall Street, leading to a Strong Buy consensus rating based on 39 Buys and one Hold. Among the Amazon bulls is Deutsche Bank analyst Lee Horowitz, who reiterated a Buy on AMZN and raised the price target to $175 from $155.
Operating Metrics Hold PromiseHorowitz was keenly interested in the operating income (OI) situation of the company. In Q2, Amazon surpassed OI expectations and provided an upbeat OI outlook for Q3 as well. This made investors start to believe that the double whammy of high costs and aggressive investments might be easing.
Nonetheless, Horowitz noted that he still maintains a cautious outlook for Q3 OI, given the rampant headwinds that Amazon has still left to fight.
The analyst expects Amazon’s free cash flows, along with the OI, to improve significantly over the next two years, as capital expenditure across the e-commerce business, particularly toward fulfillment and transportation infrastructure, moderates.
A Few Other Key UpsidesAmazon’s clear focus on slashing three of its additional cost buckets should boost investor confidence and move share prices northward.
Moreover, Amazon surprised the analyst with a slower deceleration than expected in AWS (Amazon Web Services) growth. The guidance for Q3 AWS revenues also gave Horowitz more reason to rejoice, as it “continues to point to revenue reacceleration in the 2H driven by improving delivery times and Amazon's ability to successfully pass along cost inflation.”
“Amazon's expectation for revenue growth to accelerate by 11.5 points in the 3Q at the high end of guidance on a FXN basis represents arguably the most impressive revenue growth at scale across our coverage in a hyper-challenging operating environment,” noted Horowitz.
Bottom LineOverall, Amazon’s Q2 results commentary managed to impress investors and analysts alike, even as its peers are struggling to handle the storm. Despite being cautious with his Q3 outlook, the sheer expertise with which Amazon held up and performed in Q2, and plans to steadily and practically combat the headwinds, kept Horowitz optimistic.
According to TipRanks’ hedge fund trading activity tool, hedge funds added 1.5 million shares in the last quarter, which is also encouraging. Moreover, the price target for AMZN currently stands at $176.04, which indicates a 31.21% upside to Tuesday’s price levels.
Shares of public cloud behemoth and popular e-tailer Amazon (AMZN) rallied following the release of some much better-than-expected second-quarter earnings results last week. Despite retail headwinds, AMZN has enough strength to make it through another recession without enduring too much damage. Add the disruptive growth potential from its intriguing new business ventures, and it's clear that the original tech disruptor still has disruption in its veins.
Undoubtedly, a period of economic contraction could weigh on e-commerce sales for some time. Amazon is not immune to such pressures. However, such macroeconomic deterioration could weigh more heavily on Amazon's smaller rivals.
With higher rates thrown into the equation, deep-pocketed firms like Amazon may have an easier time pressuring rivals as it looks to break into lucrative new markets. Simply put, Amazon has its hands in many pies and is more than capable of rising out of a recession in a position of power. Indeed, Amazon's recent earnings beat was the most impressive under Andy Jassy's reign and could mark the beginning of a sustained rally toward new highs.
I am bullish on Amazon stock.
Amazon's Next Wave of DisruptionIndeed, investors grew too gloomy about Amazon stock recently. The company isn't just a digital retailer poised to see sales slip going into a recession; it's a public cloud leader that's continuing to set its sights on new markets. At this pace, e-commerce could be a much smaller contributor to total revenues 10 years from now. With impressive Cloud growth and a willingness to break into new markets, Amazon's main business seems to be disruption rather than digital retail.
Indeed, many companies wish to expand into new realms. Meta Platforms (META) is just one of many firms attempting to expand into new realms. CEO Mark Zuckerberg has set the bar high with his social-media firm's new identity and aggressive metaverse push.
However, the metaverse remains abstract, and profitability from such efforts may lie far into the future. Further, it's no guarantee that Meta Platforms will be a dominant force in the metaverse 10 years from now.
Amazon sets its sights on markets capable of generating ample profitability in the present. Further, it leverages technologies to disrupt new markets with value propositions that market incumbents can't keep up with. That's real disruption that could translate into material share price upside.
Amazon's "Buy with Prime" service could have a disruptive impact on logistics, digital payments, and small- and medium-sized (SMB) e-commerce. Talk about killing three birds with one stone!
Undoubtedly, bundling fulfillment, logistics, and payments together gives prospective business customers a convenient and potentially unmatched value proposition.
With such a focus on improving customers' lives, it's tough for market rivals to keep up with Amazon.
Amazon's Impressive Quarter Sparks 10% Upside CorrectionAmazon's latest second quarter was applaud-worthy, with $121.2 billion in revenue (up 7% year-over-year and 4% quarter-over-quarter) and $0.18 in adjusted per-share earnings (beating the Wall Street consensus estimate of $0.13). Powering the beat was Amazon Web Services and its strength in Third-Party Seller Services. The stock finished 10.4% higher after earnings.
After Walmart's (WMT) quarterly fumble, which sent retail tumbling in sympathy, Amazon's quarter was a breath of fresh air to retail and the broader market.
Though retail saw a bit of pressure, it's clear that Amazon has a lot of high-growth segments that could more than offset the weakness. AWS saw an outstanding 33% growth year-over-year. Indeed, macro headwinds may not be able to push Amazon's incredible Cloud business backward.
Looking ahead, "Buy with Prime" could really give third-party seller services a massive sales jolt. With AWS and advertising momentum (up 18% year-over-year), Amazon seems like an unstoppable disruptive force in a recession.
Personally, I think a mild recession could have a similar impact as the 2020 coronavirus recession. Amazon will feel a bit of pressure, but its smaller rivals could be pressured to their breaking points. Perhaps such pressure could allow Amazon to take meaningful share and rise out of the next recession far stronger than it entered.
Wall Street's Take on AMZN StockTurning to Wall Street, AMZN stock comes in as a Strong Buy. Out of 40 analyst ratings, there are 39 Buys and one Hold recommendation.
The average Amazon price target is $176.04 implying upside potential of 30%. Analyst price targets range from a low of $118.00 per share to a high of $270.00 per share.
Conclusion: Amazon's New Initiatives Can Aid Its ResiliencyRecession or not, Amazon appears to have its foot on the gas. With new initiatives and continued momentum in the Cloud and Advertising segments, I'd be unsurprised if AMZN stock sails through the next recession with less chop.