It’s been a pretty good week for the Big Tech brigade with both Microsoft and Meta delivering better-than expected March quarter results. Today, another of the FMAANG alumni will hope to please investors. Once the bell rings to bring Thursday’s action to an end, Amazon (NASDAQ:AMZN) will step up to deliver Q1’s financials.
While the shares have outperformed the market year-to-date, Jefferies analyst Brent Thill still thinks their valuation makes them “attractive.” However, before they “meaningfully re-rate,” Thill thinks investors will have to see “clear evidence that profitability is improving, and that AWS growth has stabilized.”
Whether that is about to take place for the latter is a sticking point. Thill thinks the AWS forecast “remains cloudy.” On the Q4 earnings call, the company said AWS posted growth of mid-teens year-over-year in January and that amounts to a further drop from the 20% growth posted in 4Q22. Thill expects 13% AWS growth in the quarter, compared to consensus at 15%. “Investors remain cautious on AWS as the cloud industry slows in the face of broader macro headwinds, which could impact AMZN’s margin recovery given AWS comprises the majority of AMZN’s Op Income,” the analyst explained.
As for the profitability issue, Amazon has taken several steps to address that problem and optimize costs. These include workforce reductions (~27,000 job cuts announced) and slashing the retail footprint, amongst other initiatives. With consensus suggesting a Q1 Op Margin of 2.7% (compared to 4Q22’s 1.8%), these efforts should “begin to reflect in fundamentals.” And as the workforce cuts and increased cost efficiencies result in an “improved margin structure,” through 2023, Thill expects to see ongoing sequential Op Margin improvements.
That should also happen to the top-line, with Thill expecting net sales growth to trough in Q1 and pick up speed throughout the year. Therefore, while revenue is expected to slow to 6% in Q1 to $123.7 billion (compared to 9% in Q4), growth should accelerate to 7%/8%/9% in 2Q/3Q/4Q, respectively.
So, what does this all mean for investors? Ahead of the print, Thill reiterates a Buy rating on Amazon shares, while his $135 price target implies one-year growth of 29%. (To watch Thill’s track record, click here)
Looking at the consensus breakdown, barring one skeptic, all 35 other recent analyst reviews are positive, naturally making the consensus view on AMZN a Strong Buy. Investors could be pocketing returns of 24% a year from now, considering the average target stands at $135.50. (See Amazon stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
