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Wall Street JournalAmazon Earnings Preview: The Weakest of the Magnificent 7?
Of all the Magnificent 7 stocks, Amazon (AMZN) has been the most challenging for investors to own over the last several years. While all the other companies in the group excluding Tesla are trading significantly higher than their 2021 highs, Amazon languishes. Amazon’s stock price is at the same price as it was in July 2021. May this lack of progress in the stock price be an opportunity for discerning investors?
Amazon's stock has moved sideways over the past three years, allowing its valuation to become increasingly attractive as the company’s earnings have continued to grow. This period of stagnation in share price, combined with steady profit and sales growth, appears to have positioned the stock at a more appealing level for investors.
Today, Amazon has a Zacks Rank #3 (Hold) rating, reflecting flat earnings revisions. However, with its historically cheap valuation and strong growth forecasts, it may be an attractive addition to investors’ portfolios. Amazon reports earnings Thursday, October 24. This analysis will examine the upcoming earnings expectations for Amazon's e-commerce and cloud computing segments, as well as the potential impact of artificial intelligence on the business, to assess whether the stock presents a worthwhile investment opportunity. We will also compare Amazon to two other Magnificent 7 members – Alphabet (GOOGL) and Microsoft (MSFT).
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Amazon Earnings Projections
Despite the less than encouraging stock price action, Amazon has continuously posted strong earnings over the past year. During the last four quarterly earnings meetings, Amazon has beaten analysts’ expectations every time with an average beat of 31.13%. Although the Zacks earnings ESP is not projecting an earnings beat this quarter, earnings are projected to grow nicely nonetheless, and sales are expected to progress nicely as well.
Amazon Web Services, its cloud computing business, continues to dominate the highly competitive cloud services market, and last quarter reported a $100 billion annual revenue run rate. Most notably, web services revenue growth has been reaccelerating and shows continued expansion in margins. Artificial intelligence is and will continue to be a major catalyst for AWS, as its intense demand for computing power should power more growth in the years ahead.
Regarding the retail business, analysts are expecting close to double digit year over year growth although there are still some concerns. Expanding internationally offers growth opportunities for Amazon but also brings challenges, including the negative impact of currency fluctuations on e-commerce results, especially with the strong dollar putting pressure on profitability. Additionally, competition is intensifying as traditional retailers like Walmart and Target enhance their e-commerce capabilities, while regional rivals such as MercadoLibre, Flipkart, and Alibaba pose significant threats in key international markets.
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Comparing AMZN to AAPL and MSFT Stocks
Amazon, Microsoft, and Alphabet are all major players in the cloud computing space, with Amazon Web Services (AWS), Microsoft Azure, and Google Cloud, respectively. While AWS leads the market share, both Azure and Google Cloud have been rapidly expanding their capabilities, with Alphabet leveraging its AI expertise and Microsoft integrating cloud services with its software ecosystem.
In terms of valuation, Alphabet appears attractively priced at 21.6x forward earnings, which is below its five-year median of 23.8x. Microsoft, on the other hand, trades at a higher valuation of 32x forward earnings, above its five-year median of 22.3x. Meanwhile, Amazon is trading at 38.5x forward earnings, significantly lower than its five-year median of 70.1x, suggesting potential value as the stock has lagged despite continued growth in earnings and cloud revenues.
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Should Investors Buy Amazon Shares?
Amazon's stock has been challenging for investors over the past several years, especially compared to other "Magnificent 7" stocks. While companies like Alphabet and Microsoft have climbed well beyond their 2021 highs, Amazon's stock price is still languishing around the same level as it was in mid-2021. This lack of progress could be an opportunity for patient investors who see potential in the company's evolving business and improving valuation.
Despite stagnant stock performance, Amazon's valuation has become more attractive as earnings and revenues have continued to grow. AMZN has also spawned multibillion dollar new businesses like Advertising, Alexa and Prime video which continue to grow nicely and give another reason to never count this technology juggernaut out of the race.
As Amazon heads into its earnings report on October 24, key segments to watch include e-commerce, where nearly double-digit growth is expected, and Amazon Web Services, which continues to lead the cloud computing market. And while of course risks remain, Amazon's steady business growth, attractive valuation, and leading cloud position make it worth considering for investors willing to look beyond short-term challenges.
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Amazon.com, Inc. (AMZN): Free Stock Analysis Report
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