The world’s richest person delivers Amazon (NASDAQ:AMZN) earnings Thursday after the markets close; a stellar quarter could push AMZN stock over $2,000 as early as Friday.
To deliver the goods, I especially need to see three numbers in their quarterly report. Any signs of weakness in Amazon earnings will send its stock into full retreat. Trading at almost five times sales — Walmart (NYSE:WMT) trades at less than one times sales by comparison — it’s priced for perfection.
Check Amazon’s Free Cash Flow
In January, I suggested Amazon stock would hit $10,000 by January 2023 at the earliest and January 2025 at the latest. A chunk of my argument revolved around free cash flow.
“Over the past five years, Amazon’s grown its revenues on a compounded basis by 23% annually,” I wrote Jan. 3. “At the end of September, Amazon’s TTM free cash flow was $8.1 billion; five years earlier it was $1.1 billion, a compound annual growth rate of 49% or double its revenue growth.”
On an annualized basis, Amazon’s not going to come close to its 2017 annual free cash flow of $6.5 billion — its trailing 12-month free cash flow at the end of March was $7.3 billion, 28% less than the previous 12 months.
The fact is, Amazon’s spending almost three times what it did on an annual basis just a couple of years ago, cutting into its short-term FCF.
Long-term, the investments it’s making today are what will get its stock to $10,000 tomorrow.
I’m looking for trailing 12-month FCF somewhere around $5 billion. Anything close to that is a sign its business is doing just fine.
AMZN Stock Earnings Have Got to Beat
It seems like a no-brainer, given the company not only has beaten analyst estimates three quarters running, but it also delivered a robust Prime Day performance, notching an estimated $3 billion or more over the 36-hour sale.
In fact, out of the last eight quarters, Amazon earnings have failed to beat estimates only twice; although one of those misses was a year ago June.
On a roll, a miss at this juncture would be poorly received by the markets — analysts, according to Factset, see $2.47 a share — knocking its stock for a double-digit decline.
On the top line, the company expects revenues in the quarter somewhere between $51 billion and $54 billion. As long as it hits the low-end of the range, I can’t see investors reacting negatively to that news although analysts are expecting $53.4 billion so you never know.
Healthy Growth for AWS
As its web services business goes, so goes Amazon profitability.
“I love Costco’s (NASDAQ:COST) business model, and it’s a great stock to own, but it doesn’t hold a candle to Amazon, whose AWS business generated $1.4 billion in operating income in the first quarter, a segment that all but ensures Amazon will continue to profitably grow its business,” I wrote May 1. “If Costco’s business model is good, Amazon’s is great.”
If Amazon wants to continue capturing more of your household expenditures, it needs to keep AWS cranking out the profits. Failure to do that will slow its rate of growth on the e-commerce side of the equation because it won’t have nearly as much cash to invest in growth initiatives at Prime and Whole Foods.
Naturally, AWS has more competition these days, so it’s unwise for investors to continue to expect 40% year-over-year growth, but solid growth in the 30s is essential for the foreseeable future.
Growth below 30% wouldn’t be welcome news. It’s unlikely to happen, but I’ll be watching just the same.
The Bottom Line on Amazon Earnings
I honestly believe that Jeff Bezos could become the world’s first trillionaire. And holding AMZN stock for the long-haul continues to be one of the best investments you can make.
I’m terrible giving advice about buying a stock before or after earnings. It’s a flip of the coin. However, I am comfortable suggesting you buy half a position before Amazon earnings Thursday and the other half after its announcement, regardless of whether it hits or misses investor expectations.
And then, $10,000 here we come.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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