(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Amazon.com Inc.’s (AMZN) stock price has taken off as if it were one of Jeff Bezos’ Blue Origin rockets, rising more than three-fold over the past three years. As if analysts weren't already bullish enough, now they are looking for shares to rise even higher, by as much as 11%, from its current price around $1,910. Should shares rise as forecast, it would add another $102 billion to Amazon's market capitalization, taking it over $1 trillion, joining Apple Inc. (AAPL).
Earnings estimates are also taking off, with analysts upping their earnings outlooks through the year 2020. The optimism follows blowout second-quarter results that saw Amazon's earnings beat analyst estimates by nearly double. Even more impressive, the profits of $5.07 per share in the second quarter were nearly 11% higher than its earnings of $4.55 for all of 2017.
Upping Price Targets
Over the past month, analysts have increased their price target on Amazon, and now see shares rising to an average target of $2,120 from a prior view of $1,910 before the second-quarter results. A stunning 98% of the 47 analysts covering the stock rate it a buy or outperform.
Earnings estimates for 2018 have climbed by more than 37%, and are now forecast to rise by nearly four-fold to $17.37 per share. Previously analysts had been looking for earnings to increase by almost three-fold.
Over the past month, analysts have increased their earnings estimates by nearly 27% for 2019 and 16% for 2020. However, despite the rising projections, the growth rate for 2019 and 2020 fall to 44% and 49%, respectively. Previously analysts had been looking for earnings to climb by 57% in 2019 and 61% in 2020. The reason for the drop in the growth rate is a result of the big adjustment higher for 2018.
What is more interesting is that revenue estimates have fallen since the company reported results, by 1% to 2% per year through 2020. That suggests that the big earnings gains analysts are looking for will come from lower costs, not increasing revenue. Gross profit margins and operating margins both soared for Amazon in the second quarter to their highest level over the past five years.
The optimism for Amazon comes with good reason following the big earnings beat. But that also means that Amazon will need to start providing consistent earnings growth, something the company has struggled to do in the past.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.