As Amazon (AMZN) gears up to report its third-quarter 2024 results on October 31, investors are at a crossroads: should they buy the stock now, or wait for the earnings announcement? This quarter’s performance will be heavily scrutinized for insights into the company’s dual growth engines – its expansive Prime ecosystem and its leading cloud platform, Amazon Web Services (AWS), particularly with its accelerating investments in generative AI.
The anticipation around Amazon’s third-quarter 2024 earnings report is palpable among the investor community. Scheduled for release on October 31, these results will offer a critical glimpse into how the e-commerce giant is navigating a dynamic economic landscape while aggressively pursuing innovation. Our in-depth analysis delves into the key factors influencing AMZN’s upcoming performance, offering a comprehensive perspective for long-term investors.
Q3 2024 Expectations: Consensus and Company Guidance
For the third quarter, Amazon has guided for net sales between $154 billion and $158.5 billion, representing an anticipated growth of 8% to 11% from the year-ago quarter. This guidance reflects the company’s confidence in its operational momentum.
The Zacks Consensus Estimate aligns closely with this outlook, projecting net sales at $157 billion, which would signify a 9.7% growth year-over-year. On the earnings front, the Zacks Consensus Estimate for third-quarter earnings per share is pegged at $1.14, indicating a substantial jump of 34.12% from the prior-year quarter. This figure has remained stable over the past 30 days, suggesting consistent analyst sentiment, as detailed by Zacks Investment Research.
Historically, Amazon has a strong track record of surpassing earnings estimates. In its last reported quarter, the company delivered an impressive earnings surprise of 17.14%, and its earnings have consistently beaten the Zacks Consensus Estimate in all trailing four quarters, with an average surprise of 31.13%. However, Zacks’ proprietary model does not conclusively predict an earnings beat this time, given its 0.00% Earnings ESP and a Zacks Rank #3 (Hold).
Dual Growth Engines: Prime Ecosystem and AWS
Amazon’s growth trajectory is anchored by its robust and continuously expanding ecosystem. The Prime membership, a central pillar, continues to drive multi-channel expansion across various revenue streams.
- E-commerce Dominance: The company’s advanced delivery infrastructure, including Prime Free One-Day and Same-Day delivery services, sets industry benchmarks for consumer convenience and remains a key competitive advantage.
- Strategic Retail Expansion: Amazon’s strategic moves in the grocery sector, with expansions of Amazon Fresh stores, Whole Foods locations, and Amazon Go outlets, coupled with an enhanced distribution network, reinforce its omnichannel presence. Physical store sales are projected to reach $5.15 billion, a 4% year-over-year increase.
- Third-Party Sellers and Subscription Services: Partnerships with third-party sellers continue to be a significant growth driver, with estimated sales of $38.07 billion, reflecting a strong 10.9% increase. Subscription revenues, boosted by Prime Video’s expanded original content and ad-free Amazon Music, are forecasted at $11.13 billion, growing 9.4%.
- Healthcare Push: The innovative RxPass program, offering Prime members simplified medication delivery for a flat monthly fee, highlights Amazon’s emerging presence and long-term potential in the pharmaceutical sector.
Beyond retail, Amazon Web Services (AWS) remains the undisputed cloud leader, further solidifying its market position through strategic investments in generative AI and infrastructure. The successful adoption of Amazon Bedrock signifies a major advancement in its generative AI capabilities, attracting significant enterprise interest. AWS sales are estimated to reach $27.5 billion, implying a substantial 19.5% year-over-year increase. This combination of cutting-edge AI and robust cloud infrastructure firmly positions AWS as a primary catalyst for Amazon’s overall growth, a sentiment echoed by Morningstar’s analysis of the company’s wide economic moat.
Smart Devices and AI Innovation
Amazon’s portfolio of smart devices, including its Fire products, Echo smart speakers, Blink security cameras, doorbells, and Eero Wi-Fi systems, is expected to continue contributing positively to financial performance. Enhancements to Alexa’s features are likely to improve user experience, with impacts potentially visible in the upcoming results.
Moreover, generative AI is now a multi-billion run-rate business for Amazon. CEO Andy Jassy highlighted the company’s commitment to this area, stating, “We will continue to invest more capital in chips, data centers, and power to pursue this unusually large opportunity that we have in generative AI,” as reported by The Motley Fool. This aggressive investment, while impacting capital expenditures, is viewed by many investors as a necessary and strategic move to capitalize on the immense potential of AI.
Valuation and Investment Outlook
From a price performance perspective, Amazon’s shares have appreciated 23.6% year-to-date, outperforming the broader Zacks Retail-Wholesale sector and the S&P 500 index’s rise of 19% and 21.9%, respectively. While this outperformance is encouraging, valuation remains a key consideration for new investors.
Zacks’ analysis indicates that AMZN is currently trading at a premium with a forward 12-month Price-to-Sales (P/S) ratio of 2.86x, compared to the Zacks Internet-Commerce industry’s 1.7x and higher than the median of 2.8x. This suggests a “stretched valuation” for the stock at present levels.
Conversely, Morningstar assigns a 3-star rating, considering Amazon’s stock “fairly valued” compared to its long-term fair value estimate of $195 per share. Morningstar’s perspective emphasizes that traditional multiples can be less meaningful for Amazon due to ongoing heavy investments and rapid scaling that temporarily depress financial performance, but they anticipate significant free cash flow generation as the company matures.
Risks and Opportunities
While the long-term prospects remain strong, investors should be mindful of potential headwinds. Morningstar assigns a “medium” uncertainty rating to Amazon, citing challenges such as evolving consumer preferences, increased competition from traditional retailers bolstering their online presence, and the need to maintain an attractive value proposition for third-party sellers. Additionally, significant investments in fulfillment, delivery, and AWS, coupled with projects like the Kuiper satellite initiative, are expected to dampen free cash flow growth in the near term.
However, the underlying investment thesis for Amazon remains compelling. The company’s unparalleled scale, robust balance sheet (with $86.8 billion in cash and marketable securities against $58.3 billion in debt as of December 31, 2023), and continued margin expansion driven by high-margin advertising and AWS, position it for sustained long-term growth. The integration of generative AI across all segments further strengthens its competitive moat and offers substantial future potential.
Final Thoughts for Investors
Amazon’s near and long-term prospects are undeniably strong, fueled by its aggressive retail strategies, expanding global presence, growing Prime adoption, and solid AWS momentum with a deepening focus on generative AI. The company’s ability to maintain its dominant positions in both e-commerce and cloud computing, while innovating in new sectors like healthcare, paints a picture of resilient growth.
For investors considering adding AMZN to their portfolio, the core dilemma remains: buy before earnings or wait? While the stock has outperformed peers year-to-date, some valuation metrics suggest a premium. Those with a long-term horizon who believe in Amazon’s strategic investments in AI, logistics, and ecosystem expansion may view current levels as an attractive entry point, particularly given Morningstar’s “fairly valued” assessment. However, more cautious investors, particularly those sensitive to short-term volatility around earnings or concerned about stretched valuations, might find it prudent to wait for a clearer post-earnings picture or a more favorable entry point. Ultimately, Amazon’s fundamental strengths and innovation pipeline make it a compelling consideration for sustained financial performance.
