As Amazon.com, Inc. Stock Trails FAANG Peers, Look for After-Earnings Pop

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Of the FAANG stocks, Amazon.com, Inc. (NASDAQ:AMZN) has been the most disappointing in recent months. Since mid July, Facebook Inc (NASDAQ:FB) is up more than 8%, both Netflix, Inc. (NASDAQ:NFLX) and Apple Inc. (NASDAQ:AAPL) are up 6.5%. AMZN stock, meanwhile, is actually down 2.6% in that time frame.

As Amazon.com, Inc. Stock Trails FAANG Peers, Look for After-Earnings Pop
Source: Shutterstock

There is a logical explanation for this.

AMZN stock has a big valuation. At 130-times next year’s earnings estimates, Amazon needs everything to run smoothly in order for AMZN stock price to head higher. Last quarter’s numbers didn’t imply “smooth” operations. While revenue growth remains stellar, AMZN seems to be back in big spending mode and that is weighing on profits. Without robust profit growth, AMZN’s valuation only looks bigger. That adds more risk, and the market appropriately adjusts AMZN stock price downward.

But Amazon stock is rebounding and is finally consistently trading north of $1,000 for the first time since July. This rally comes ahead of AMZN’s next quarterly report, which is due Oct. 26.

Those numbers could be good, and considering how poorly Amazon stock has performed over the past three months, good numbers could translate into a big pop for the stock.

Amazon Earnings: Good or Bad?

FAANG stocks are already off to a great start this earnings season. Streaming video giant Netflix reported blowout third-quarter numbers earlier this week. The story at Netflix remains the same as it has been for the past several quarters. Ever since Netflix doubled-down on original content, subscriber growth has taken off like a rocket ship.

Netflix’s numbers add credence to the thesis that the FAANG tech giants continue to dominate their respective spaces. For Amazon, the translation is that the company continues to dominate the retail and public cloud markets.

That isn’t so hard to believe. Secular tailwinds in e-commerce remain strong. Search interest in Amazon.com has moved noticeably higher over the past several months. The company recently unveiled some cool new products aimed strongly at the smart home market. Amazon Web Services is now charging by the second (versus by the hour), a price-lowering move which should allow for market share gains.

Infographic: All-Conquering Amazon Elicits Fear in Corporate Boardrooms | StatistaSource: Statista

All in all, its likely that AMZN had a pretty good quarter. And unlike NFLX stock, which had big expectations priced into its stock ahead of the report (up 10% from prior quarterly print), the expectations on AMZN stock are much lower. Amazon stock is actually down about 2% since its last quarterly print.

Lowered expectations in the face of a still-strong secular backdrop make for a good earnings set-up on AMZN stock.

Long-Term Amazon Growth Story Is On Fire

Regardless of the quarterly numbers, the long-term Amazon growth narrative remains as attractive as ever.

 

Amazon is importantly extending its brick-and-mortar presence through a partnership with Kohl’s Corporation (NYSE:KSS). Amazon will now start selling smart-home products in Kohl’s stores as well as allow for product returns. This move captures the shoppers who still have yet to gravitate to the digital channel. While the KSS deal in it of itself may not be a game-changer, the partnership marks the start of potentially explosive gains in brick-and-mortar retail for Amazon.

Also consider that Amazon is gearing up to launch its own athletic clothing line. Having a brick-and-mortar retail presence would be immensely useful for branding purposes for this new clothing line. While growth here is purely speculative, it is nonetheless attractive considering the robust popularity of active-wear.

Meanwhile, Amazon is doing what its supposed to be doing with Whole Foods Market: slicing prices and driving huge traffic share gains. In the two days following nation-wide price cuts, Whole Foods saw foot traffic jump 25%. Traffic trends have moderated, but remain up year-over-year.

Granted, Whole Foods is most likely a money-losing business for Amazon right now, but that won’t last long. Eventually, with automated technologies coming to the fore, Amazon will be able to significantly reduce Whole Food’s 28% operating expense rate (sack people, install machines). Thus, its only a matter of time before WFM generates significant profits for Amazon.

Plus, all those Whole Foods locations put Amazon significantly closer to breaking into the $400 billion pharmacy market, something the company has wanted to do for some time.

Then there is Amazon Web Services (AWS), which remains the leading platform in a secular growth market. There are no signs of AWS’s leadership position eroding. Growth rates remain healthily above 40%.

Bottom Line on AMZN Stock

The set-up into next week’s earnings report looks good. Moreover, the long-term growth trajectory looks about as good as ever.

All in all, there is little reason to sell AMZN stock here but a whole bunch of reasons to buy it.

As of this writing, Luke Lango was long AMZN, FB, NFLX, and GOOG.


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/as-amazon-com-inc-stock-trails-faang-peers-look-for-after-earnings-pop/.

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