Amazon’s (NASDAQ:AMZN) year-to-date performance has closely mirrored the overall markets, with its 22% gains nearly matching those of the S&P 500. Investors, however, are hoping that the upcoming Q3 earnings readout will help the stock kick off an outperforming rally.
Goldman Sachs’ Eric Sheridan, a 5-star analyst rated in the top 4% of the Street’s stock pros, thinks a few themes are likely to be on display in the upcoming print. Sheridan is expecting “relatively stable eCommerce demand,” with units growing faster than revenue due to lower ASPs. Sheridan also anticipates a strong performance in advertising, driven by the expansion of initiatives such as video, connected TV, and international markets, along with “solid U.S. eComm advertising growth.” There should also be “continued acceleration” for AWS, as previous headwinds ease (such as the impact of cloud optimization).
As for the topics taking center stage for investors, the big one remains the “trajectory of EBIT margins into 2025.” On this, Sheridan reckons Project Kuiper investments – Amazon’s initiative to build a satellite network aimed at providing global broadband internet for the underserved – could have up to a “$3bn incremental EBIT impact” while losses in Amazon’s Devices and Services division are expected to surpass $7 billion in 2024 and continue growing, partially due to Kuiper. Meanwhile, a deep dive into “retail margin drivers,” showed that slower Stores profit growth, rather than operational expenses or investments, was the biggest headwind to retail EBIT margins in Q2. That said, while Stores unit economics worsened in the quarter, there is potential for improvement over time as Amazon boosts customer lifetime value through larger and more frequent purchases, as well as initiatives such as “order consolidation.”
So, what does Sheridan deduce from all that? “We conclude that: 1) Non-core investments are large/growing and any segment disclosure around Devices & Services would give investors better visibility on core profitability (similar to Alphabet’s Other Bets and Meta’s Reality Labs). & 2) We remain in the camp that investments geared to meet the consumer at lower price points and expanding selection (incl. essentials) are sound long-term strategic decisions,” he explained.
Just as importantly, looking at the long-term picture, the analyst thinks that Amazon will achieve a “solid mixture” of consolidated revenue growth and operating margin expansion over the coming years, while simultaneously making “critical investments in long-term growth initiatives.”
To this end, Sheridan gives AMZN a Buy rating, with a $230 price target suggesting a potential 24% gain over the next 12 months. (To watch Sheridan’s track record, click here)
Overall, it’s clear that Wall Street agrees with Sheridan’s call on this. The stock has 47 recent analyst reviews on file, and these include 45 Buys against just 2 Holds, for a Strong Buy consensus rating. With an average price target of $224.38, this stock shows a one-year upside of 20%. (See Amazon stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
