Amazon is a Solid Buy Ahead of Q4 Earnings

The world’s largest e-commerce company, Amazon.com, Inc. AMZN has progressed leaps and bounds in the past decade under CEO and Founder Jeff Bezos. It is clear from the nine-fold rise in its revenues to an estimated $232 billion last year.

And now, it’s one of the largest companies in terms of market value. Not only growth in the e-commerce segment but also its leadership in the cloud computing segment and new product lines like Alexa have worked in favor of Amazon.

This e-commerce titan had trounced Wall Street expectations in the last quarter and has gained more than 30% in the past year. It has also fared better than the broader S&P 500 decline of 2.7% over the period.

But, can Amazon crush earnings estimates when it reports fourth-quarter results on Jan 31? Let’s take a look —

Strong Holiday Sales

Analysts from SunTrust have warned that the e-commerce giant have generally had limited success in the fourth quarter. According to SunTrust, the last time Amazon surpassed analyst expectations in the fourth quarter was that in 2009.

However, this time around, things are looking better for Amazon. Strong holiday online sales will surely show on its earnings results. After all, online retail sales climbed 19.1% during the holiday period (from November 1 through December 24) as compared to the year-ago period, according to Mastercard SpendingPulse report.

Also, Amazon has seen the best holiday season ever last year. The e-commerce giant claimed that it shipped a billion products for free in the United States alone through its Amazon Prime subscription program.

Stifel analysts further noted that more than half of U.S. households have an Amazon Prime account. Consumer Intelligence Research Partners Inc added that Amazon’s Prime has reached a staggering 101 million members. Needless to say, the Prime service offers free two-day shipping on millions of items as well as video and music streaming.

Thus, Amazon Web Services (AWS) has become an even more powerful profit machine. After all, compared to Amazon Prime, Spotify, Hulu and Tinder have fewer global subscribers at 71 million, 17 million and 3 million users, in that order.

Amazon’s AWS business have successfully brought in $5.1 billion in operating income for the first nine months of last year despite facing stiff competition from major tech players like Microsoft Corporation MSFT and Alphabet Inc. GOOGL.

Ad Business on the Rise

Stifel analysts added that there is “significant growth from Amazon’s advertising business over the next several years as the company leverages its valuable consumer data/traffic volume to provide sellers and brands with more tools to effectively reach consumers.” To top it, Amazon’s cloud and advertising business is gaining prominence and its retail sales volume is also improving. Amazon acquiring Whole Foods Market did help the company expand its fresh food offerings.

Stifel, thus, rates Amazon shares buy with a $2,400 price target. Cowen analyst John Blackledge, by the way, remains bullish on the stock as they expect growth in e-commerce, apparel, consumables, food and home products businesses. Monness Crespi Hardt analyst Brian White chipped in “strength in ad revenue was a positive surprise in 2018” and expects this factor to further boost profitability this year.

Earnings Results Expected to be Encouraging

Blistering growth trajectory in the e-commerce business, strong earnings momentum from AWS and improvement in ad business bode well for Amazon in the fourth quarter. Amazon, thus, is widely expected to post $5.55 a share in earnings, up from $2.16 reported a year ago.

The Zacks Rank #2 (Buy) company also has an Earnings ESP of +16.59%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

If this wasn’t enough, the Zacks Consensus Estimate for its current fiscal year earnings has moved up 1% in the past 60 days.

Upbeat earnings performance, no doubt, will lead to a rally in the share price. The company’s expected earnings growth rate for the current year is a whopping 333%, in contrast to the Internet – Commerce industry’s expected decline of 7%. In fact, the company has outperformed the broader industry so far this year (+11.2% vs +9.7%).

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