Amazon.com, Inc. (AMZN) heads into its earnings report this Thursday with Wall Street analysts expecting that Amazon stock is ready to start going the way of Apple Inc. (AAPL).
They couldn’t be more wrong.
While many still think of AMZN as the retail giant that it is, there are so many facets to the company that are shining brighter than the retail business — facets that are setting Amazon stock up for the next decade of performance, not the next year.
Amazon Web Services
We’ll start with the Amazon Web Services, a business line that many investors may not even be aware of. The web services arm of Amazon represents a cloud computing initiative that operates in 12 different regions of the world.
I know, cloud computing is nothing new to the market, but Amazon’s dominance isn’t as well-known as it should be.
For instance, last year, revenue for Amazon Web services was more than the cumulative revenue for their four largest competitors. Who is the competition in the space? How about Microsoft Corporation (MSFT), Alphabet Inc (GOOG, GOOGL), International Business Machines Corp. (IBM) and Salesforce.com, Inc. (CRM). Last quarter’s revenue for AWS showed growth of 78% on a year-over-year basis, blowing the doors off their competitors.
This will be the No. 1 data point that we will be watching on the earnings release on Thursday after the close as a continuation in the breakneck revenue growth is likely to drive Amazon stock into the stratosphere.
Logistics
Moving on, Amazon continues to build out some of its future as the company is moving toward claiming its own logistics network. Recently, Re/code reported that the company had obtained a license to ship freight from China — just one of many moves that investors should be taking note of.
AMZN appears to be expanding its logistics reach to the point where it seems to be building channels all the way from producers to consumers. In addition to overseas shipping and plans to complete an acquisition of French delivery company Colis Privé, Amazon has been rumored to be interested in potential regional air hubs and acquiring leases on 20 airplanes.
If you’re United Parcel Service, Inc. (UPS) you have to start getting concerned about Amazon running its own packages to customers’ doorsteps — or even worse, someday delivering other companies’ packages through an efficient logistics network.
A Look at Amazon Stock
Unlike the vast majority of stocks in the S&P 500, Amazon stock remains technically sound as the shares are trading above their 200-day moving average and the longer-term 20-month moving average. That technical strength will continue to attract traders and investors alike.
If there’s a hitch in the short-term outlook for AMZN, it’s the sentiment heading into this week’s earnings announcement. The current whisper number for Amazon earnings is $1.70 per share compared to Wall Street analyst’s expectations of $1.61.
The 5.6% higher whisper number suggests there could be some selling pressure on the shares even if the company matches Wall Street’s expectations, though we would consider any short-term selling as an opportunity to grab this relative strength performer “on sale.”
In addition to the whisper estimates showing optimism in AMZN, the current short interest and analyst recommendations suggest there is somewhat of a crowded trade forming on Amazon stock. While we usually avoid stocks with these signs, it is important to remember one of the most important rules of contrarian research, which is that sentiment is most powerful when it is counterintuitive to the stock’s fundamental and technical outlooks.
In other words, the strength of trend and fundamentals will override the relatively optimistic sentiment.
With this in mind, we’re expecting Amazon stock to fall within an acceptable win/loss scenario. On the win side, we see a target of $695 — a 15% move from Monday’s close. Downside risk is a move to the stock’s 200-day moving average, currently at $529, or about 10% from Monday’s close. From this perspective, we’re risking 10% to gain 15% … and if AMZN did move to the low range, we would dollar-cost average into existing positions to lower our cost per share, which would only raise the net return when the stock eventually hits our upside target.
Bottom line, Amazon stock deserves an allocation in most investors’ portfolios during 2016. Grab it before it runs higher.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
