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Strategies & Market Trends : Technical analysis for shorts & longs

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Amazon Stock Q4 Forecast: Can AMZN Rise Higher to Finish 2024 in Style?
Mohit Oberoi - Barchart - 1 hour ago + Follow

Consumer Cyclical (names A - H) - Amazon_com Inc_ storefront by- Markus Mainka via Shutterstock

With a YTD gain of nearly 20%, Amazon's (AMZN) price action is largely in line with the Nasdaq Composite ($NASX). AMZN stock, however, trades around 9% below its record highs. In this article, we’ll look at Amazon’s Q4 forecast and analyze whether the stock can end the year in style.

Amazon stock peaked in early July, and hasn’t been able to reach those levels since. The company’s Q2 earnings spooked investors; while Amazon's profits came in ahead of Wall Street's estimates, it missed revenue forecasts, and provided downbeat guidance for the third quarter.

Moreover, Amazon’s earnings came at a time when global markets were crashing amid concerns of a recession in the U.S., exacerbated by the unwinding yen carry trade after the Japanese central bank raised interest rates.

Amazon Stock Has Recovered from Its LowsSince then, Amazon stock rebounded from its August lows amid the recovery in broader markets. While the tech-heavy Nasdaq Composite has yet to reclaim its record high, both the S&P 500 Index ($SPX) and Dow Jones Industrial Average ($DOWI) have set record highs after the Fed’s 50-basis point rate cut.

www.barchart.comWhy the Fed’s Rate Cuts Are a Positive for AmazonAmazon’s costs rose sharply in 2022 amid multi-decade high inflation, which took a toll on its profits and cash flows. However, inflation has since cooled down, which provided the much-needed legroom for the Fed to transition to an accommodative monetary policy. The central bank's so-called dot plot indicates another 50 basis points worth of rate cuts this year, and unless we see a macro shock - such as spillover from the dockworker strike, or a steep rise in energy prices due to the Middle East conflict - U.S. inflation seems headed downwards.

Falling inflation and lower interest rates are positive for Amazon – especially for the company’s e-commerce business – as it should help spur discretionary spending. Notably, Amazon as well as brick-and-mortar retail companies have cited lower discretionary spending for slower revenue growth. However, if Costco’s (COST) most recent earnings are any indication, discretionary spending is picking up, which bodes well for the retail sector and e-commerce companies like Amazon. The base case scenario looks like a soft landing for the U.S. economy, and the odds of a recession are low – even as it is something that cannot be ruled out totally.

Amazon is Also a Formidable AI PlayWhile the rally in artificial intelligence (AI) stocks has lost momentum, and even Nvidia (NVDA), the bellwether of the group, has struggled to reach its June highs, the technology seems to be here to stay.

Amazon is a multi-faceted AI play, and several of its businesses – especially the enterprise-focused Amazon Web Services (AWS) – are benefiting from growing global AI spending. During the Q2 earnings call, CEO Andy Jassy said, “Our AI business continues to grow dramatically with a multibillion-dollar revenue run rate, despite it being such early days.”

AMZN Still Has Multiple Growth DriversAmazon has several other growth drivers – like advertising, for instance. Amazon’s ad revenues are expected to stay strong, and the Financial Times reported that the company will increase ads on Prime in 2025.

Amazon's business-to-business (B2B) platform, Amazon Business, is another potential growth driver to watch, and it is already running at a multi-billion-dollar gross revenue run rate.

Along with delivering on top-line growth, Amazon has kept costs in check. The company has lowered its cost base structurally, which should support its bottom line in the coming quarters. The return-to-office mandate is being seen as a ploy to trim payroll without paying severance costs.

Amazon’s Valuations Look ReasonableAmazon trades at a next 12-month (NTM) price-to-earnings (PE) multiple of 35.9x, which doesn't look too demanding, considering the expected long-term double-digit revenue growth that the company brings to the table. AMZN's profit growth is also expected to stay strong, with analysts modeling a 20.4% YoY rise in 2025.

www.barchart.comMoreover, Amazon is a cash flow powerhouse, and has generated free cash flows (adjusted for equipment finance leases) of $51.4 billion in the trailing 12 months that ended in June.

Recently, Truist analyst Youssef Squali raised Amazon’s target price from $230 to $265, while reiterating his “buy” rating. While the analyst believes AMZN will beat Q3 estimates, Squali finds the stock particularly attractive around current levels, trading at just 18 times cash flow from operations (CFO). Importantly, Amazon’s cash flows have stayed strong despite the higher outlay for AI capex.

AMZN Stock Forecast Wall Street analysts share Squali’s optimism. Of the 46 analysts covering AMZN, 43 rate it as a “Strong Buy,” and 3 as a “Moderate Buy” – which makes it the highest-rated stock among its “Magnificent 7” peers.

Amazon’s mean target price of $226.18 is 22% higher than Wednesday’s closing prices. The stock trades even below the Street-low target price of $200, while Truist’s Street-high target price of $265 implies a potential upside of more than 43%.

All things considered, I believe that the best is yet to come for Amazon, and it remains an attractive tech name trading at reasonable valuations. I see scope for AMZN stock to rally further in Q4 amid stabilizing growth, strong profits, and healthy free cash flows.

More Stock Market News from Barchart

On the date of publication, Mohit Oberoi had a position in: AMZN , NVDA . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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