Stock Analysis & Ideas

Wall Street’s Conviction: Inflation Cannot Bring Down Amazon

Story Highlights

Amazon has too many upsides to ignore, despite delivering mixed 2Q results. Investors are rushing back to the stock.

E-commerce giant Amazon’s (AMZN) mixed results for the second quarter did not deter investors from scooping up its shares. Despite facing setbacks due to inflation in Q2, Amazon seems to have strong and unavoidable upsides.

Following the result, Amazon enjoyed a slew of Buy ratings from Wall Street, leading to a Strong Buy consensus rating based on 39 Buys and one Hold. Among the Amazon bulls is Deutsche Bank analyst Lee Horowitz, who reiterated a Buy on AMZN and raised the price target to $175 from $155.

Operating Metrics Hold Promise

Horowitz was keenly interested in the operating income (OI) situation of the company. In Q2, Amazon surpassed OI expectations and provided an upbeat OI outlook for Q3 as well. This made investors start to believe that the double whammy of high costs and aggressive investments might be easing.

Nonetheless, Horowitz noted that he still maintains a cautious outlook for Q3 OI, given the rampant headwinds that Amazon has still left to fight.

The analyst expects Amazon’s free cash flows, along with the OI, to improve significantly over the next two years, as capital expenditure across the e-commerce business, particularly toward fulfillment and transportation infrastructure, moderates.

A Few Other Key Upsides

Amazon’s clear focus on slashing three of its additional cost buckets should boost investor confidence and move share prices northward.

Moreover, Amazon surprised the analyst with a slower deceleration than expected in AWS (Amazon Web Services) growth. The guidance for Q3 AWS revenues also gave Horowitz more reason to rejoice, as it “continues to point to revenue reacceleration in the 2H driven by improving delivery times and Amazon’s ability to successfully pass along cost inflation.”

“Amazon’s expectation for revenue growth to accelerate by 11.5 points in the 3Q at the high end of guidance on a FXN basis represents arguably the most impressive revenue growth at scale across our coverage in a hyper-challenging operating environment,” noted Horowitz.

Bottom Line

Overall, Amazon’s Q2 results commentary managed to impress investors and analysts alike, even as its peers are struggling to handle the storm. Despite being cautious with his Q3 outlook, the sheer expertise with which Amazon held up and performed in Q2, and plans to steadily and practically combat the headwinds, kept Horowitz optimistic.

According to TipRanks’ hedge fund trading activity tool, hedge funds added 1.5 million shares in the last quarter, which is also encouraging. Moreover, the price target for AMZN currently stands at $176.04, which indicates a 31.21% upside to Tuesday’s price levels.


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