Buy Amazon Stock for Big Breakout Q4 Earnings Potential?

Benjamin Rains
·6-min read

Shares of Amazon AMZN are down around 6% from their early September 2020 highs, which is somewhat striking considering that the Nasdaq and the S&P 500 have raced to new records since the election. Wall Street appears to be weighing the likelihood of possible government intervention. This means investors will be glued to the e-commerce titan’s upcoming Q4 earnings release on February 2.

Quick Q4 Overview

Amazon’s cloud-computing peer Microsoft MSFT on Tuesday reported blowout quarterly results, driven once again by strong cloud growth. The report helped MSFT, which had also underperformed recently, surge in after-hours trading.

Apple AAPL, Facebook FB, Tesla TSLA, and a ton of other big names are also set to report this week. So far, fourth quarter results have come in stronger-than-projected and the outlooks for 2021 continue to improve (also read: Q4 and 2021 Earnings Estimates Keep Going Up).

Antitrust Worries?

Amazon, Alphabet’s GOOGL Google, and Facebook, have all come under scrutiny in Washington for their outsized impacts on consumers and various marketplaces. The e-commerce giant has faced criticism about the fact that it competes against other retailers and third-party sellers on a platform that it controls.

AMZN and CEO Jeff Bezos have pointed out that other retailers, including the likes of Target TGT also sell their own products that compete against other brands in stores and online.

The company is sure to fight back against any real legal action that might be taken. And any possible antitrust charge is tricky given that Amazon has helped lower prices for consumers. One could also argue that Amazon’s success has forced the industry to stay competitive on pricing and catch up on delivery and digital sales.

Other Fundamentals

Despite the worries, Amazon stock has climbed about 11% since the November election. But this does come in well below the S&P 500’s 19%. Clearly, Amazon stock has still been on a stellar run and has climbed 85% in the last 12 months and 475% over the past five years.

The Seattle giant is built for the current economic environment and the future of retail and tech, and its recent performances showcase its strengths. Last quarter, Amazon’s revenue jumped 37%, or $26 billion to over $96 billion. Plus, while many industries and companies were forced to cut jobs due to the coronavirus, Amazon has gone on a hiring spree.

Amazon’s online store sales jumped 38% in Q3, while third-party seller services surged 55%. Outside of its core retail unit, its Prime-heavy subscription revenue popped 33%. More importantly, the overall e-commerce market has tons of more room to grow since it accounted for roughly 14% of total U.S. retail sales in Q3, down from a record 16% in Q2. This is up from 11% in the year-ago period, but some might have expected the figure to be higher considering the near-perfect conditions to outperform.

Meanwhile, the company’s AWS cloud computing unit was already booming before the coronavirus helped spur businesses to speed up their digitalization and remote capabilities. AWS revenue popped 30% last quarter, with its digital ad-heavy “Other” space up over 50%. Investors should also note that Amazon is now the third-largest player in the space behind only Google and Facebook.

What’s Next?

Moving on, Zacks estimates call for Amazon’s Q4 sales to surge 37.5% (same as Q3) to a mind-blowing $120.2 billion, to help lift its adjusted EPS figure by 8%. Amazon’s adjusted fiscal 2020 EPS figure is projected to climb 50%, on roughly 36% stronger sales that would see it hit $380.8 billion.

This growth projection would top last year’s 21% revenue growth and beat FY18 and FY17’s 31% sales expansion. In fact, it would mark its strongest sales expansion since 2011’s 40% jump. Peeking further down the road, Amazon’s FY21 sales are expected to jump another 18% or $67 billion higher to reach $447.9 billion to help lift its earnings by 30%.

Bottom Line

Amazon closed regular trading Tuesday at $3,326 a share to put it about 6% below its September records. Wall Street might be higher on AMZN heading into earnings, with the stock up around 9% in the past week, which helped it break through its 50-day moving average.

Amazon currently grabs a Zacks Rank #3 (Hold), alongside an “A” grade for Growth in our Style Scores system. AMZN also trades at a discount against the S&P 500 in terms of forward sales at 3.6X vs. 4.6X. Amazon looks even stronger compared to high-flyers and e-commerce peers Etsy’s ETSY 14.5X and Shopify’s SHOP 38.6X.

Amazon hasn’t historically made huge moves around earnings and it’s always risky to play for near-term gains. Yet, investors with long-term outlooks shouldn’t necessarily try to time the market or stocks.

Therefore, people that are high on Amazon’s future might want to consider scooping up the tech power that might be due to break out soon. And 27 of the 31 brokerage recommendations that Zacks has for Amazon come in a “Strong Buy,” with the rest at a “Buy.”

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