This Could Be Huge for Amazon Stock
Amazon.com, Inc. (NASDAQ:AMZN) stock was the #2 gainer on the S&P 500 last year. Will 2016 be another great year for Amazon stock?
Well, the start wasn’t very good. Amazon stock went into a nosedive at the beginning of this year. Even after its nice V-shaped recovery started in February, AMZN stock is still down 6.4% year-to-date.
There is still hope, though. The company is reporting earnings. Here’s what analysts are expecting…
Overall, expectations are quite high, and that’s because Amazon has been doing much better financially compared to a year ago. In the first quarter last year, the company had a loss of $0.12 per share. This time, analysts are expecting $0.58 in earnings per share (EPS). (Source: “Analyst Estimates,” Yahoo! Finance, last accessed April 21, 2016.)
Wall Street is also upbeat about Amazon’s top-line growth. For the quarter, analysts are projecting $27.99 billion in revenue for the e-commerce giant. That would represent a 23.2% increase from the $22.72 billion of revenue in the year-ago period.
Does the company have a chance at beating those high expectations? Well, let’s first take a look at what happened last year: In both the second and the third quarter of 2015, analysts were projecting $0.14 in losses per share. How did Amazon do? The company locked in more than $0.30 in EPS both times. Those earnings beats sparked an enormous rally in AMZN stock.
The huge growth engine for Amazon right now is its cloud-computing arm, “Amazon Web Services” (AWS). AWS is one of the fastest-growing and most profitable segments of the company. Last time Amazon reported earnings, net sales from AWS surged nearly 70% year-over-year. AWS’ operating margin also expanded from 16.9% in Q4 2014 to a much better 28.5% in Q4 2015. (Source: “Amazon.com Announces Fourth Quarter Sales Up 22% to $35.7 Billion,” Amazon.com, Inc., January 28, 2016.)
Note that Amazon also moved into the “Internet of Things” (IoT) space with “AWS IoT.” Instead of just building IoT devices, AWS IoT is a managed cloud platform that can support billions of devices and trillions of messages.
Despite Amazon stock’s high price tag, there are still analysts who are bullish on the company. Earlier this week, Credit Suisse analyst Stephen Ju reiterated his “Outperform” rating on AMZN stock with a price target of $800.00. That represents a more than 25% potential upside. (Source: “Credit Suisse Analyst Comments on Facebook Inc, Amazon.com, Inc. Ahead of Upcoming Earnings,” Smarter Analyst, April 19, 2016.)
In particular, Ju’s discounted cash flow valuation of Amazon turned out to be $147 billion, which was higher than consensus pricing. Also, the analyst believes that running AWS will not be as capital-intensive as before, which would help to produce higher free cash flow. Lastly, Ju points out that the company is improving its shipping management, which could lead to higher operating margins in its e-commerce business.
Another catalyst, which won’t be reflected in next week’s earnings report, is Amazon’s launch of its standalone video streaming plan. In the past, the service was offered as a part of the “Amazon Prime” membership, which costs $99.00 a year. Now, consumers can sign up for Amazon’s standalone on-demand video streaming service on a month-to-month basis. At $10.99 a month for “Prime Video,” the yearly cost is actually more than the cost of an annual Prime membership, but it does not require an annual commitment.
What this move suggests is that Amazon is now aiming directly at Netflix, Inc. (NASDAQ:NFLX), which recently increased its high-definition streaming plan to $9.99 per month. Netflix currently dominates the on-demand video streaming business with more than 81 million global subscribers. Following Netflix’s strategy might not be a bad idea for Amazon.
The Bottom Line on AMZN Stock
Amazon is scheduled to report earnings after the closing bell next Thursday. If its numbers can beat analysts’ already-high expectations, we might see another rally in AMZN stock.