Will Amazon Stock Poop Out No Matter What? (AMZN)

Amazon stock - Will Amazon Stock Poop Out No Matter What? (AMZN)

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As Amazon.com, Inc.’s (NASDAQ:AMZN) third-quarter report approaches, Amazon stock is on an historic tear.

Will Amazon Stock Poop Out No Matter What? (AMZN)

Big-cap stocks just don’t rise like this. AMZN stock is up more than 12.5% in just the past three months. From Oct. 13-17, shares rose more than 4%.

Driving Amazon stock forward were bullish forecasts from TV pundits like Bill Miller of LMM Investments, who says the company’s stock price should grow in line with its sales, and a new Goldman Sachs price target of $1,050.

Management’s own projections, made after their June report, were that the company could do $32.2 billion in business for the September quarter, 27% higher than a year ago. However, AMZN expected income would fall anywhere from $50 million to $650 million.

The average estimate is for profits of 86 cents per share, something over $400 million, but there is a “whisper number” of 93 cents, and hope for sales to reach $32.5 billion.

What Drives Amazon Stock?

The thing that pushes AMZN forward is free cash flow, which hit $5 billion for last year’s fourth quarter, and tends to be very seasonal. Management’s cash flow projection for the coming Christmas will be a key metric for analysts on its earnings call, and if the projection is conservative, that could drive Amazon stock down in after-hours trading regardless of Q3 results. It may take a number as high as $6.5 billion to satisfy them.

In July, Amazon held its now-annual “Prime Day,” a clearance sale, which should boost the top line this quarter. But AMZN has many moving parts. Analysts will be especially keen to see reports on revenue and market share for Amazon Web Services (AWS) and Fulfillment by Amazon, through which it rents its infrastructure to other companies.

AWS, the cloud it offers for sale and rent, is facing new competition from the likes of Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) but it still dominates in bare-bones infrastructure and enjoys high margins, now that much of it is built-out.

Amazon’s Prime membership plan has proven as powerful as that of Costco Wholesale Corporation (NASDAQ:COST), which is also based near Seattle, and that grew to 63 million at the end of June, up from 53 million six months earlier.

Prime members pay $100 per year for free shipping and a basket of other services that include music and video. Prime has helped Amazon capture 35% of the e-commerce market, and surveys indicate as many as 55% of shoppers now go directly to AMZN when they want to buy, bypassing search engines.

What Could Go Wrong for AMZN

There are very few Amazon bears left, which should be a bull’s chief concern. Because if everyone is already in the stock, anything could push the shares down sharply.

For years, the argument against Amazon was that it reported skimpy profits, or no profit at all. And it’s true that whenever profits seem ready to grow, the company finds something new to do with its money instead.

Recently, AMZN has invested heavily in India and is now growing out its own delivery fleet to compete with United Parcel Service, Inc. (NYSE:UPS) and FedEx Corporation (NYSE:FDX), with tests of drones and purchases of aircraft.

These days, when Amazon announces it’s entering a new market, it’s the competitor that comes under a bear attack. This happened with stock in Etsy Inc (NASDAQ:ETSY) when Amazon announced a crafts market, and to grocery stocks when Amazon recently announced it would sell its own private-label food and grocery products under the “Mama Bear” brand.

Of the 46 analysts currently following AMZN stock, 35 have it rated as a buy, and that could be the most bearish signal you could find about the stock. Amazon is priced to perfection, and anything hinting at something less could send it sharply lower.

That’s not the way to bet, but if it does happen, the fall will be sharp.

But so will the rebound, as those who didn’t get into Amazon stock earlier pile back in.

Dana Blankenhorn is a financial journalist and author of the science fiction story Into the Cloud. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2016/10/amazon-stock-amzn-q3-earnings-preview-iplace/.

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