Key Points
Amazon has had a strong quarter with growth in all operating segments. Analysts predict a reversal in the market that could increase share prices significantly this year. There are signs of a long-term head and shoulders pattern forming, which could result in a new all-time high for the market.
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Despite slower growth in the AWS segment, Amazon.com Inc. (NASDAQ: AMZN) is performing well in all segments and is expected to experience a complete reversal. Amazon was a pioneer in the cloud industry over twenty years ago and faced little competition until recently. Now, Microsoft Inc. (NASDAQ: MSFT) is gaining market share, but AWS still shows double-digit growth and is comparable to Microsoft’s Intelligent Cloud business in terms of revenue.
What is a reversal? A reversal refers to a change in the direction of price action, either from up to down, down to up, or sometimes from up or down to sideways. Earlier this year, Amazon’s shares hit a near-term bottom and transitioned from a downward trend to a sideways one. However, there are indications that a larger reversal is underway, shifting the bias from sideways to upward.
Amazon has achieved significant growth and margin expansion in all segments this quarter. The company’s net revenue of $143.1 billion is up by 12.6% year-over-year (YOY) and 11% on an FXN basis. All three operating segments experienced double-digit growth, with international leading at 16%, AWS up by 12%, and North America up by 11%. The shift to regional fulfillment centers has been a significant driver of growth, surpassing optimistic expectations. Additionally, AWS is driving growth through generative AI, which has the potential to generate billions in annual revenue.
The company has also made notable margin improvements in all segments. These improvements are a result of cost-cutting efforts and revenue leverage, contributing to increased GAAP earnings. Although the GAAP earnings of 94 cents include a $1.2 pre-tax gain related to the valuation of Rivian shares, adjusting for that, earnings have tripled compared to last year and exceeded the consensus by a wide margin. Moreover, the company’s free cash flow has turned positive for the quarter, improving the balance sheet.
The guidance provided by Amazon is mixed but ultimately favorable for higher share prices. The revenue guidance for the fourth quarter, ranging from $160 to $167 billion, is slightly below the MarketBeat.com consensus. However, this is offset by an expectation of continued margin strength. Operating income is expected to double at the low end of the range and triple at the high end. Both top- and bottom-line targets might be cautious, but the company has clear momentum, and the US consumer remains resilient.
Analysts have been leading Amazon into this reversal since the beginning of the year. The consensus sentiment among analysts has remained a Moderate Buy, with a rising price target since early Q2. The consensus price target of $165 indicates a potential upside of 38%, and it is likely to increase further after the Q3 results. Recent individual targets are even higher than the consensus, suggesting greater upside potential. The lowest target is just below the current price action, indicating limited downside risk.
Institutional activity has also supported Amazon’s price action over the past year. Although institutions own only 57% of the stock, they have been net buyers over the past four quarters. The inflows have exceeded the outflows by 45%, consistent with the formation of a bottoming pattern.
With the consensus price target of $165 and the rising sentiment among analysts, AMZN shares are expected to easily surpass the neckline. This could lead to increased market momentum, pushing the price above $140 and potentially even surpassing $165 on the way to retesting all-time highs. Interestingly, the weekly candlestick chart shows solid support at the current price levels with a significant lower shadow.
Before considering Amazon.com, it’s worth noting that MarketBeat does not include it among the five top-rated stocks currently recommended by analysts. However, Amazon.com does have a “Moderate Buy” rating among analysts. To discover the top-rated stocks recommended by analysts, you can view them here. Additionally, if you are looking to generate income with your stock portfolio, you can use these ten stocks to generate a safe and reliable source of investment income.
