After several rough weeks, when persistently stubborn inflation led to fears of 70s-style stagflation – that is, high inflation with low-to-nil economic growth – the stock markets have shifted into a better mood.
The turnaround comes as investors digest the earnings results, midway through reporting season. Roughly half of the S&P-listed firms have reported, and the aggregate shows a 3.9% year-over-year gain in revenues with a 3.4% gain in earnings. It’s a slowdown from recent quarters, but better than had been expected. Notably, two ‘Magnificent 7’ tech stocks, Microsoft and Alphabet, have provided significant surprises to the upside.
Looking ahead, we’ll see two important tech firms report earnings today: Amazon (NASDAQ:AMZN), a billion-dollar-plus ‘Mag 7’ stock, and Advanced Micro Devices (NASDAQ:AMD), a leader in the semiconductor industry. Both will report results from Q1 2024 after the markets close, and investors will be watching carefully to see how they shake out.
Against this backdrop, Deutsche Bank analysts have been evaluating the tech giants to determine the superior one to buy ahead of earnings today. Here’s a closer look.
Amazon
We’ll start with Amazon, the world leader in online retail and e-commerce – and a company with a proven record of survival through economic downturns combined with long-term success. Amazon has risen to its dominant position through excellence in execution at its core business, building up an unparalleled inventory of items available for online purchase while guaranteeing short-term deliveries. In addition, the company has its hands in a wide range of growing tech fields, including AI, cloud computing, and online services.
A quick look at Amazon’s businesses will provide some background to the upcoming earnings. Its core, of course, is online retail, based on the Amazon.com site. The website consistently receives more than 2 billion monthly visits, and scored 2.4 billion visits in March of this year. The e-commerce business rakes in approximately $1.3 billion in daily revenue and is backed up by a world-class network of logistic centers and warehouses.
That’s Amazon’s largest facet. Rounding out the business, Amazon has its AWS cloud computing subscription service, its various online services, and is going all-in on generative AI as its ticket to the future. The company is already a major backer, to the tune of $4 billion, in the gen AI startup Anthropic and has a major investment in AI-capable GPU semiconductor chips. Amazon CEO Andy Jassy has said publicly that the company aims to build an AI product ecosystem on top of the existing AWS service. The strong move into AI aims to keep Amazon relevant.
Looking ahead, the Street’s analysts are predicting the company will report revenues of approximately $142.55 billion for 1Q24, supporting earnings of $0.83 per share. This would represent nearly 12% growth year-over-year at the top line. Last year, Amazon brought in a total of $574.8 billion in revenues, for a $60 billion year-over-year gain.
Deutsche Bank’s 5-star analyst Lee Horowitz has looked under the hood at Amazon, and he sees plenty of reasons for an upbeat outlook.
“Amazon remains our favorite name across our e-commerce coverage heading into earnings given: 1) healthy underlying industry and credit card data trends that should be supportive of 1Q revenue upside and 2Q revenue expectations that are well within reach; 2) upside to 1Q and 2Q operating income estimates given constructive Advertising checks and incremental revenue via Prime Video and Amazon’s growing social advertising partnerships, as well as ongoing gains in driving cost to serve below 2018 levels; and 3) 1Q Street AWS estimates that are entirely too conservative given that they call for Q/Q dollar declines that are more pronounced than what the company delivered at the peak of the optimization cycle. This, despite accelerative underlying demand across essentially all portions of the AWS business,” Horowitz opined.
For Horowitz, this adds up to a Buy rating, and his $210 price target points toward a one-year upside potential of ~16%. (To watch Horowitz’s track record, click here)
Overall, it’s clear that Wall Street’s bulls are running for AMZN. The stock has 42 recent, unanimously positive analyst reviews, for a Strong Buy consensus rating. Meanwhile, the stock’s $213.74 average price target implies ~18% one-year gain from the current share price of $181.51. (See AMZN stock forecast)
Advanced Micro Devices
Next up is AMD, a major player in the semiconductor industry. AMD’s position is built on its solid portfolio of high-capacity processing chips, which have found strong demand among both data centers and generative AI applications. These products include AMD’s Ryzen AI mobile processors, which have also found popularity among gamers who value high-capacity chips that can power graphics-intensive entertainment, and the Versal AI core-adaptive SoCs. The company also has several lines of accelerator products, such as the MI300 series, which is used in both AI and HPC applications; the Instinct GPU accelerators, and the Alveo Adaptive accelerators.
Data centers and related AI applications are the bright spots in AMD’s business. In the company’s last earnings report, covering 4Q23, the data center segment generated $2.3 billion of the quarterly revenue total, for a segment gain of 38% year-over-year. This segment was up 7% y/y for 2023 as a whole, reaching $6.5 billion. The company’s data center business recorded these gains even as the Client, Gaming, and Embedded segments saw y/y declines.
When we look forward to Q1, we find that analysts are expecting to see a quarterly top line of $5.45 billion, or a gain of $100 million, almost 2%, year-over-year. Wall Street expects to see a jump in sales for chips in AI and PC applications, particularly in the new MI300 accelerator line. These chips are intended to compete directly with market leader Nvidia, and strong sales there should bode well for AMD’s prospects as a whole.
The company’s reliance on AI presents an interesting background for the comments by Deutsche Bank’s 5-star analyst, Ross Seymore, who says of the company’s prospects: “Entering 1Q24 earnings, we expect fundamentals at AMD to remain bifurcated as DC/AI goodness (server CPU cyclical rebound + MI300 growth) is partially offset by ongoing cyclical challenges across Client, Gaming, and Embedded. Beyond the print/guide, we believe the most anticipated aspect of the event will be any update to the co’s 2024 outlook for MI300 revenues. On this metric, we believe buy-side expectations have recently fallen on the back of suspected order cancellations by MSFT (yet to be substantiated), but still are likely at a minimum of $4b.”
Seymore goes on to sum up his assessment of AMD, and to make a concrete recommendation for investors: “Overall, the dimming of AI enthusiasm in recent weeks has presented an intriguing pullback in AMD shares for some, and we have high confidence in mgmt’s ability to continue to convey a positive AI-related message on the earnings call. However, with shares still in-line with our price target (a healthy ~30x our CY25 EPS), we believe AMD is fairly valued and thus maintain our Hold rating.”
That Hold rating from Deutsche Bank comes along with a $150 price target, implying a one-year downside of 6.5% for the shares. (To watch Seymore’s track record, click here)
The analyst consensus, however, is rather more bullish on AMD. The stock’s 30 recent analyst reviews break down 23 to 7 favoring Buys over Holds, for a Strong Buy consensus rating. Furthermore, the $203.96 average target price suggests a 27% upside potential for the shares on the one-year horizon. (See AMD stock forecast)
With the analysts’ calls put side-by-side, it’s clear that Deutsche Bank sees Amazon as the superior tech stock to buy ahead of today’s earnings.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
