Amazon earnings set to soar, can the stock follow? – Stock Markets

26 janv. 2024 à 12h40 GMT- Marios Hadjikyriacos

• Amazon will release earnings on Thursday, after the closing bell

• Impressive earnings growth expected, driven by advertising and cloud

• That said, valuation is not cheap, which could limit upside in stock price

 

 

Bringing costs under control

Amazon’s share price rose by a stunning 81% last year, as the market regained confidence in the company’s ability to deliver profits. After its share price plunged in 2022, Amazon restructured its operations with an emphasis on slashing costs, shutting down unprofitable projects and laying off thousands of employees. 

These moves were successful. Costs were brought under control and the company returned to profitability, propelling its shares higher as a result. That said, the share price is still 16% away from its record highs, so it has not fully recovered, even though the broader stock market has. 

In terms of growth drivers, the majority of Amazon’s profits come from its Web Services segment, which is currently the world’s top cloud provider by market share. In addition, its advertising business is booming as well. This is a relatively new business segment, but it is growing rapidly, stealing market share from advertising titans such as Meta or Google. 

Solid quarter expected

For the final quarter of 2023, analysts expect Amazon to report earnings per share of $0.80, which would represent a whopping 220% increase from the same quarter in the previous year. Revenue is anticipated to have risen by 11.3% over the same period. 

The market reaction will depend on whether the actual numbers are stronger or weaker than these forecasts. It is worth noting that Amazon has a strong history of exceeding earnings projections, having done so in all four of the preceding quarters. 

Another element that will shape the market reaction is the commentary by management about the future outlook, and in particular any investments in artificial intelligence (AI) projects. Even though Amazon invested $4 billion in Anthropic last year, a competitor to Microsoft’s ChatGPT, many investors think it has fallen behind in the AI wars. 

This sense of caution around Amazon’s future in AI might be what has prevented its shares from reaching new record highs. Looking at the charts, Amazon’s stock needs to pierce above the $158.50 zone, and beyond that the $170.00 region, before it can set its sights to new records.  

On the flipside, a disappointing earnings report could push shares lower, initially towards the $150.00 area, where the 50-day simple moving average (SMA) is also located.  

Valuation is not cheap, limiting room for upside

Now turning to the valuation, Amazon’s stock price is currently trading for 42 times what analysts expect earnings to be over the coming year. That is under the assumption that earnings will grow by 35% this year, so it is safe to say that a lot of good news is already baked into the cake. 

Even though this is one of the lowest valuation multiples that Amazon has ever traded at, that still does not mean the stock is cheap. Markets often assign higher valuations to younger companies that are growing fast, but as a company matures, the valuation multiple naturally declines as the scope for future growth becomes more limited. 

Amazon seems to be going through this process right now, so it would not be surprising to see the valuation multiple decline further. In other words, Amazon cannot rely on speculation and investors’ hopes to push its share price higher anymore. What it needs is stronger growth in earnings. 

New investments in artificial intelligence would go a long way in helping Amazon reach this goal, and allowing its stock to revisit record highs.