The past three months have seen Amazon (NASDAQ:AMZN) investors witnessing the stock consolidate as dip-buyers put up a strong defense at the $120 level. While AMZN has lagged behind the S&P 500 (SPX) (SPY) since my last update in August, there hasn’t been a mass exodus of buyers.
The concerns about a potential hard landing have become more pronounced lately, as investors fret over the bear steepening in long-duration yields and its impact on consumer spending for big-ticket items. Additionally, the continuous surge in long-term bond yields raises the possibility of a credit crunch, leading to a wider economic downturn.
Recent comments from Fed Chair Jerome Powell indicate that the Fed’s stance will remain hawkish in response to the economy’s resilience. However, there is talk that a potential interest rate hike at the upcoming two-day meeting starting on October 31 will likely be postponed for now, given the surge in the 10-year yield (US10Y).
It’s understandable that investors are concerned about the potential impact of a hard landing on Amazon, given its dominant presence in the consumer e-commerce space. Furthermore, the company needs to convince investors that it can fend off the generative AI threat posed by Microsoft (MSFT) and Google (GOOGL) in the hyperscaler sector. Despite Amazon’s leadership in IaaS, Wedbush views Microsoft as the leader in the AI field, while Google has shown a remarkable comeback since its stumbles in early 2023, suggesting it is not far behind Microsoft.
Therefore, it’s not surprising that Amazon CEO Andy Jassy had the need to assert Amazon Web Services’ (AWS) position as the cloud computing leader to the AI community. The recent $4 billion investment in AI company Anthropic is expected to demonstrate to investors and enterprise customers that AWS remains at the forefront of generative AI.
Furthermore, Amazon appears to be ahead of Microsoft with its customized Trainium and Inferentia AI chips. However, whether this confers a distinct advantage to AWS against Nvidia’s full-stack AI ecosystem, which includes H100 and CUDA, remains to be seen. Nvidia’s DGX Cloud is also seen as a direct challenge to Amazon’s IaaS leadership. AWS has yet to partner with Nvidia’s DGX cloud, marking a clear departure from its leading hyperscaler peers.
Amazon is scheduled to release its third-quarter or FQ3 earnings on October 26. Despite pulling back more than 15% from its September highs, sentiment among buyers for AMZN remains strong (A momentum grade).
Therefore, it is likely that investors are confident that management will provide positive forward earnings commentary, corroborating the positive “B+” earnings revisions grade.
Amazon is still expected to achieve significant growth in operating leverage over the next two years. Wall Street analysts forecast a 2-year EBITDA CAGR of nearly 19%. As a result, AMZN is priced for growth, and its execution will be crucial as it seeks to expand its retail margin.
Reports suggest that Amazon is looking to enhance its advertising business by expanding its ad-supported offerings on its streaming service. It has explored assisting merchants in creating their streaming video ad offerings. Given Amazon’s diverse retail base, this initiative could boost Amazon’s higher-margin growth drivers in digital advertising and help improve its retail margins.
Furthermore, Jassy’s track record of turning around the retail business should give validation to his execution abilities. Amazon overspent during the pandemic under the supervision of Amazon retail head Dave Clark, and the retail business can still benefit from increased cost synergies as Amazon focuses on improving the efficiencies of its delivery promise through a regionalization strategy.
Buyers of AMZN have been steadfastly holding the $120 level. A break below that level could potentially lead to further downside towards the $100 zone, although that is not my base case scenario at the moment.
Despite the increasing rhetoric around a hard landing, the price action of AMZN demonstrates significant buying support. Therefore, I am not overly concerned about short-term volatility in AMZN and believe it presents a golden opportunity to accumulate more shares.
Rating: Maintain Buy
Important note: Investors are reminded to conduct their own due diligence and not rely solely on the information provided as financial advice. Please exercise independent thinking and note that the rating does not indicate a specific entry or exit point at the time of writing, unless otherwise specified.
We Want to Hear From You
Do you have constructive comments to improve our analysis? Have you noticed any critical gaps in our perspective or important information that we may have missed? Do you agree or disagree? Leave a comment below and let’s all learn together as a community!