E-commerce giant Amazon.com, Inc. (AMZN) is scheduled to release its quarterly earnings results on Thursday, October 26, 2023, after the market closes. Amazon anticipates net sales to be between $138 billion and $143 billion or to grow between 9% and 13% compared to the corresponding quarter of 2022.

AMZN’s operating income is expected to be between $5.50 billion and $8.50 billion, compared with $2.50 billion in the third quarter of 2022.

Analysts expect the company’s revenue and EPS for the third quarter (ended September 2023) to increase 11.4% and 112.7% year-over-year to $141.61 billion and $0.60, respectively. In addition, AMZN surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

AMZN’s second-quarter net sales were $134.38 billion compared to the $131.34 billion estimated by analysts. The company reported an EPS of $0.65, higher than analysts’ expectations of $0.34. Moreover, it posted its biggest earnings beat since its report for the fourth quarter of 2020.

However, AMZN’s cloud infrastructure unit, Amazon Web Services (AWS) revenue growth continued to be on a constant decline. Companies are trimming their cloud expenses amid concerns about persistent inflation, higher interest rates, and enhanced economic uncertainty.

Over the last three quarters, AWS growth rates dropped substantially, from nearly 20% to 16% to 12% in the second quarter of 2023. Also, AMZN’s core e-commerce business is witnessing declines in growth following the COVID-19 pandemic boost. It was flat compared to last year’s second quarter, dropping about 4% from 2021’s same quarter.

Adding up to its challenges, AMZN faces an anti-trust lawsuit from the Federal Trade Commission (FTC) and 17 state attorneys general, alleging that the online retail and tech company is a monopolist that uses interlocking anticompetition and unfair strategies to maintain its monopoly power illegally.

According to FTC and its state partners, AMZN’s actions allow it to stop rivals and sellers from lowering prices, overcharging sellers, degrading quality for shoppers, and preventing rivals from fairly competing against Amazon.

Shares of AMZN have gained 21% over the past six months to close its last trading session at $128.56. However, the stock has plunged 1.9% over the past month.

Let’s look at factors that could influence AMZN’s performance in the upcoming months.

Positive Recent Developments

On September 28, AMZN’s AWS introduced five generative AI innovations, assisting organizations of all sizes to build new generative AI applications, improve employee productivity, and transform their business. The company shared new announcements, including the general availability of Amazon Bedrock and expanded model choice with Llama 2 and Amazon Titan Embeddings.

On September 25, AMZN announced an investment of up to $4 billion in the AI start-up Anthropic to seek a bigger footprint in AI development and compete with growing cloud rivals on AI. This strategic investment might give Amazon a competitive advantage and drive its growth.

Solid Financials

For the second quarter that ended June 30, 2023, AMZN’s net sales increased 10.9% year-over-year to $134.38 billion. Its operating income grew 131.6% from the year-ago value to $126.70 billion. The company’s income before income taxes came in at $7.56 billion, compared to a loss of $2.65 billion in the prior-year quarter.

Furthermore, the company’s net income was $6.75 billion and $0.65 per share, compared to a loss of $2.03 billion and $0.20 in the previous year’s quarter, respectively. Also, its cash inflows from operating activities were $16.48 billion, up 83.8% year-over-year.

Mixed Historical Growth

AMZN’s revenue and EBITDA grew at respective CAGRs of 18.7% and 17% over the past three years. Its total assets grew at a CAGR of 22.7% over the same time frame. However, the company’s net income and EPS declined at CAGRs of 0.3% and 1%, respectively, over the same period.

Also, the company’s levered free cash flow decreased at a CAGR of 14.4% over the past three years.

Favorable Analyst Estimates

Analysts expect AMZN’s revenue for the fiscal year (ending December 2023) to increase 4.5% year-over-year to $537.27 billion. The consensus EPS estimate of $2.06 for the current year, compared to a loss per share of $0.27 in the prior year.

For the fiscal year 2024, the company’s revenue and EPS are expected to grow 11.8% and 43.7% year-over-year to $600.49 billion and $2.96, respectively.

High Profitability

AMZN’s trailing-12-month gross profit margin of 45.53% is 27.6% higher than the 35.68% industry average. And its trailing-12-month EBITDA margin of 11.79% is 8% higher than the 10.92% industry average. Likewise, the stock’s trailing-12-month CAPEX/Sales of 10.90% is 238.9% higher than the industry average of 3.22%.

Stretched Valuation

In terms of forward non-GAAP P/E, AMZN is currently trading at 58.64x, 333% higher than the industry average of 13.54x. Moreover, the stock’s forward EV/Sales and EV/EBIT of 2.48x and 49.66x are 128.2% and 297.3% higher than the industry average of 1.09x and 12.50x, respectively.

In addition, AMZN’s forward Price/Sales of 2.29x is 187.4% higher than the industry average of 0.80x. Also, its forward Price/Cash Flow of 14.96x is 86.7% higher than the 8.01x industry average.

POWR Ratings Reflect Uncertainty

AMZN’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. The stock has an A grade for Sentiment, consistent with favorable analyst expectations.

AMZN has a C grade for Stability, justified by its 24-month beta of 1.46.

On the other hand, the stock has a D grade for Value, in sync with its higher-than-industry valuation.

AMZN is ranked #16 of 57 stocks in the Internet industry.

Beyond what I have stated above, we have also given AMZN grades for Growth, Momentum, and Quality. Get access to all the AMZN Ratings here.

Bottom Line

AMZN beat analysts’ estimates in the second quarter and provided better-than-expected guidance for the third quarter. However, the company continues to face challenges in its cloud computing and e-commerce businesses as it is exposed to the cyclicality of the economy. Amid high inflation and rising interest rates, consumers are becoming more cost-conscious.

Further, FTC investigation could be one of the most severe risks for the e-commerce company in the short term.

Given its elevated valuation and uncertain near-term outlook, it could be wise to hold AMZN and wait for a better entry point in the stock.

Stocks to Consider Instead of Amazon.com, Inc. (AMZN)

Given its uncertain short-term prospects, the odds of GS outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) or B-rated (Buy) stocks from the Internet industry instead:

Yelp Inc. (YELP)

Netflix Inc. (NFLX)

Travelzoo (TZOO)

To explore more A and B-rated internet stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

AMZN shares fell $1.46 (-1.14%) in premarket trading Wednesday. Year-to-date, AMZN has gained 53.05%, versus a 12.00% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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