Amazon on the Verge of a Remarkable Q2: Analyst Sees 22.3% Upside Potential
As Amazon.com Inc AMZN prepares to unveil its Q2 earnings results on Thursday after the market close, expectations are running high for what could be a stellar performance. With just six days to go, analysts are eagerly anticipating insights into the e-commerce and cloud giant’s financial trajectory. BofA Securities analyst Justin Post has painted a particularly optimistic picture for Amazon, projecting a potential 22.3% upside with a $220 price target and maintaining a Buy rating for the stock.
Key Takeaways:
- Amazon is projected to beat Q2 revenue estimates, reaching $149 billion, driven by strong online spending and growth in Amazon Web Services (AWS).
- AWS is anticipated to deliver robust growth, exceeding the Street’s expectations with a projected 18% year-over-year increase.
- Amazon’s operating profit is likely to surpass estimates, potentially reaching $15-$16 billion due to positive contributions from third-party fees and Prime advertising.
- Despite a promising Q2 outlook, caution is advised for Q3 profit guidance due to rising freight costs and high expectations.
Aiming for a Q2 Beat: $149 Billion Revenue in Sight
Post forecasts Amazon’s Q2 revenues to hit $149 billion, a substantial 40 basis points above Wall Street’s projected figures. This optimistic outlook is fueled by a positive trend in online spending, according to aggregated card data from BofA and Bloomberg Second Measure, which contradicts previous predictions suggesting a more significant decline. Notably, AWS is expected to contribute significantly to this growth, with Post anticipating an 18% year-over-year increase, surpassing the Street’s estimate of 17%. Robust backlog growth and increasing consumption spending, particularly in AI model training, are driving the growth in AWS.
Further bolstering the case for strong Q2 earnings is the expectation of a substantial operating profit. Post estimates an operating profit of $14 billion, with the potential to reach $15-$16 billion due to several favorable factors. These include increased revenue from third-party fees and strong growth in Prime advertising.
Retail Sales and Cloud Powering Growth at Amazon
The positive revenue projections are underpinned by the strength of both Amazon’s retail and cloud businesses. Despite a challenging economic environment, data suggests that online spending has accelerated, indicating a healthy demand environment for Amazon’s retail operations. The robust growth in AWS further underscores the importance of cloud computing for the company.
The recent positive earnings performance of Google, a key competitor in cloud services, suggests limited pricing pressure for AWS. This bodes well for Amazon, potentially leading to a one-point quarterly acceleration and improvement in margins for AWS.
Cautious Q3 Outlook Amidst Margin Concerns
While Q2 looks promising for Amazon, Post advises a more cautious approach to the Q3 profit guidance. The analyst points to several potential risks, including high expectations and rising freight costs, which could negatively impact margins. Historically, Amazon has been conservative in its Q3 guidance, often undershooting Street estimates but subsequently exceeding them by an average of 33% over the past three years. This pattern suggests that Amazon may be playing it safe with its guidance, leaving room for positive upside surprises.
Post projects Q3 revenue guidance between $155.5 billion and $160.5 billion, indicating a respectable 5% quarter-on-quarter growth. The analyst anticipates GAAP operating profit to range between $12 billion and $15.5 billion, reflecting a potential for continued profitability despite the challenging operating environment.
Still Room for Growth Despite Expanded Multiples
Despite Amazon’s stock being valued at 12.8x EV/EBITDA, below its 10-year average of 17x, Post believes there is ample room for multiple expansions in 2024. The analyst anticipates expanding retail margins, supported by the growth of Prime advertising and the continued acceleration of AWS, to drive further gains in the stock’s valuation. Post highlights that these improving margins justify a more traditional P/E valuation framework, with the 30.7x Street ’25 GAAP EPS seen as reasonable given the expected 27% two-year GAAP earnings growth CAGR.
Amazon’s Future Remains Bright: A Compelling Investment Opportunity
As Amazon approaches its Q2 earnings release, investors are keenly focused on the e-commerce giant’s ability to deliver another strong performance. With solid revenue estimates, robust cloud growth, and a positive outlook for the remainder of 2024, Amazon remains a compelling investment opportunity. Post’s $220 price target, representing a potential 22.3% upside, highlights the potential for continued growth and value creation.
While navigating external challenges, Amazon’s ability to adapt and innovate across its vast portfolio of businesses suggests a bright future. The company’s unwavering commitment to expanding its reach and delivering value to its customers positions it for continued success in the years to come. Investors will be watching closely as Amazon unveils its Q2 results, eager to gain further insights into the company’s trajectory and its potential to continue defying expectations.
