Of the magnificent seven stocks most investors spend a disproportionate of time assessing, Amazon (NASDAQ:AMZN) continues to be one of my top picks. In addition to providing market-beating returns for most years over the course of the past two decades, Amazon has grown into an absolutely dominant force in the key e-commerce, cloud and AI sectors.
Key Points
- Amazon is among the most-watched stocks in the market, and will drive plenty of attention heading into month end.
- The cloud and e-commerce giant is expected to report Q3 results on October 30 – here’s what the market expects from the Magnificent 7 giant.
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As such, investors who have continued to hold outsized weightings to AMZN stock over the past few decades have continued to outperform.
There’s a long history that tells a story of scale in key industries, and why holding onto one’s winners (like Amazon) makes sense. But here’s why I still think Amazon is a buy as we head into the company’s next expected earnings release due October 30.
Upcoming Earnings Report Pivotal
A businessman looking at an earnings report
Every earnings report for a key company like Amazon, you’re likely to hear talking heads and so-called financial experts tout a given report as “the biggest in X company’s history.” That’s tended to be the case with Amazon and other key high-flying stocks driven by recent AI catalysts.
At least for now, Amazon’s recent robust growth does appear to justify its premium valuation, particularly if the company’s AI efforts lead to even greater efficiency. In Amazon’s upcoming earnings report, analysts and market participants will undoubtedly be diving into the company’s margins and underlying growth (from specific segments) as indicators of whether this company’s valuation reflects its forward-looking growth picture.
With strong Q2 results in the books (13% annualized growth as per this past quarter), driven by an 18% increase in AWS revenue and promising AI investments and partnerships, there are certainly high expectations for what’s to come. Current whisper numbers appear to be modestly above Wall Street’s consensus Q3 estimates for a range of between $177.5 and $177.9 billion in revenue and $1.57 in ESP (a 10% increase year-over-year).
In other words, if Amazon can beat these numbers materially, this is a stock that could be headed much higher from here.
What Would Drive a Higher Multiple?
Question mark on a dinner plate
Looking at Amazon’s trailing price-earnings and price-sales multiples (at 33.5-times and 3.5-times, respectively), Amazon isn’t a cheap stock by any means. However, this is a company that’s justified an above-market multiple for a long time. And that’s been precisely due to the fact that the cloud and e-commerce giant has been able to continuously grow its revenue and earnings at a much faster rate than companies of similar size (or even those with much smaller market capitalizations).
I do think that there’s a fundamental bullish argument to be made for buying and holding Amazon stock here, particularly if the company can. grow its cash flow at a double-digit rate for the years to come. That’s what the company is projecting, with around 20% cash flow growth in its core AWS division doing most of the work.
So long as cloud growth remains strong, and Amazon’s AI investments continue to pay off, there’s a lot to like about where this stock is positioned. A lot can change between now and the next quarter or two, and I’m sure we’ll be looking at a much different company a few years down the line.
But given Amazon’s historical performance, the ability of the company’s management team to look ahead to future growth opportunities and invest aggressively, I like where this stock is trading today. Amazon remains a buy, at least in my books heading into this print.
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