Over the past decade, Wall Street has witnessed the meteoric rise of Amazon (NASDAQ:AMZN). With a market cap of about $910 billion, AMZN stock is now one of the largest publicly listed companies. In the U.S. as well as in many other countries, it is the dominant online retailer. In recent years, Amazon has also expanded into other growth areas such as cloud computing where it has already become a leader.
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However, since early July, long-term AMZN shareholders have been somewhat concerned with the stock’s price action. On July 11, Amazon stock hit an 52-week high of $2035.80. On Aug. 26, it saw a recent low of $1743.51. Currently the Amazon stock price is hovering around $1850.
Now many investors are wondering if this quarter AMZN stock goes and stays over $2000, a price that has become an important resistance level.
Until its next earnings report on Oct. 24, I expect AMZN to stay range-bound, possibly between $1750 and $1900. In other words, Amazon stock would need to show strong Q3 financial numbers that would act as catalyst to push the stock over $2,000 again. Here is why.
Amazon Stock’s Unimpressive Q2 Earnings
In July, when Amazon reported earnings for its second fiscal quarter of 2019 , it missed on the bottom line as it warned profits would disappoint in Q3, too. Amazon stock’s EPS in the quarter was $5.22, compared to the forecast EPS of $5.56.
The retail giant beat analysts’ average revenue estimate by a small amount. Its Q2 revenue came at $63.4 billion. Wall Street was looking for $62.5 billion. In Q2 2018, Amazon had posted $52.9 billion in sales.
Amazon stock’s revenue comes from five main segments:
- Retail Products (about 65% of its revenues)
- Retail Third-Party Sellers (about 12% of its revenues)
- Amazon Web Services, or AWS (about 15% of its revenues)
- Subscriptions such as Amazon Prime (about 5% of its revenues)
- Other, such as credit card agreements and advertising (about 3% of its revenues)
During the quarter, Amazon’s U.S. sales increased by 17% to $35.8 billion. The group’s international sales grew by 9% to $16.2 billion.
Amazon stock’s AWS segment is the growth driver operating at high margins. The group especially uses the cash generated from AWS to fund the growth in other segments.
Wall Street noted that Subscriptions, which mainly constitute Amazon Prime members, were up 37% to $4.7 billion.
Investors noted that the group’s renewed investments into the company are paying off as sales increased. However, this sales growth is coming at the expense of lower profit margins.
Since the release of the quarterly results, investors have decreased growth expectations for the coming months, as partly reflected by the sharp drop in the AMZN stock price.
Wall Street Needs to See Revenue Growth in AMZN Stock
Not only has Amazon stock changed the world of e-commerce, but the company has been disrupting how consumer shop overall. Yet, these earnings results show that the revenue growth of Amazon’s online store, third-party sellers, and subscriptions has been decelerating.
Furthermore, AWS, or Amazon’s cloud business, reported its slowest growth rate in several years. Its AWS revenue hit $8.4 billion. However, the consensus estimate was for $8.5 billion. In Q2 2018, the unit revenue had been $6.1 billion. Investors were especially concerned that the growth in AWS is not offsetting the top-line declines of other segments.
Over the past few years, revenue and operating profits of AWS have grown extremely quickly. However, its mouth-watering operating margins have also attracted serious competition from other tech giants.
Going forward, Amazon expects its investments to increase, another factor that will negatively affect its bottom line and potentially Amazon stock in the near future. The company is expected to invest heavily in its advertising business, Prime Video, international growth, shipping, and logistics.
When the company releases Q3 earnings in late October, analysts will be paying attention to the various growth metrics that Amazon reports. Management gave Q3 net sales guidance to be between $66-$70 billion. This guidance would mean a growth of between 17% and 24% compared with third-quarter 2018.
To me, earnings results in the past few quarters show that AMZN stock is becoming increasingly dependent on AWS for revenue growth. Therefore, in Q3 I would be interested to see the metrics for each segment.
Is It Time to Buy Amazon Stock Now?
If you are wondering whether you should buy Amazon stock right now, the answer depends on your evaluation of Amazon’s fundamentals and on your investing time horizon.
In the coming weeks, I expect AMZN stock to trade in a range between $1,750 and $1,900. If Amazon stock stays above the $1,820 level, it is likely to test $1,900 and above soon.
Year-to-date AMZN share price is up over 21%. If you already own AMZN stock, you might want to hold onto your shares. However, within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss about 3%-5% below the current price point, especially if you want to protect your paper profits.
AMZN is a is a high beta stock at 1.55. The stock market has a beta of 1.0. Therefore Amazon stock’s beta measures its volatility in relation to the market. In other words, in general, AMZN stock rises more than the market in bullish conditions and decreases more when markets are falling. Short-term traders should exercise caution if they want to participate in Amazon stock’s wide daily swings.
Patient investors who continue to believe in AMZN may see any price dip towards or below the $1,750 level as an opportunity to go long AMZN stock and ride out its daily volatility.
Amazon stock will need to stabilize and build a base again before it can deliver a long-term, sustained rally that would take the shares over $2,000.
The Bottom Line on AMZN Stock
When Amazon next reports its Q3 results in October, investors will scrutinize the company’s fundamentals. If the results show that the company’s growth has slowed further, investors may decide that Amazon is now a maturing company. As a result, they may think that the current valuation of Amazon stock is excessive.
Nonetheless, it is important to remember that a mega-company with fundamentals as robust as Amazon’s could withstand several months of uncertainty. And, eventually, AMZN’s management will make decisions that will move the company forward.
On Sep. 25, Amazon will be holding its next hardware event. Wall Street would be looking to see what Alexa-enabled products may be introduced in the coming months.
Management also continues to invest heavily in original video content development and online streaming services. I’d also continue to observe that space for its potential effect on AMZN stock revenue.
In two to three years, I expect AMZN stock investors to be rewarded handsomely. Eventually, fundamental catalysts will drive Amazon stock higher, and the stock price will rise above $2,000 again.
As of this writing, the author did not hold a position in any of the aforementioned securities.
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