Amazon’s (NASDAQ:AMZN) share price has tumbled by almost 10% from its peak of $200 set in early July. Investors have taken profits and are rotating into small-cap stocks that will benefit most from lower interest rates. Its earnings report is expected to be released on August 1, 2024, and it feels like a coin toss as to which way the stock will react.
On one hand, Wall Street analysts have remained extremely bullish. Analysts have all reaffirmed their buy ratings ahead of earnings. Out of 54 analysts, the lowest price target is $180, with the average being $223.15.
On the other hand, the markets have been critical of tech earnings so far. This recent weakness in the NASDAQ is due to high valuations. Thus, stocks have tumbled even when there have been positive results. For example, Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) saw its stock price decline by about 5% after earnings. This occurred despite beating analyst expectations on revenue. But it missed estimates for YouTube growth.
Therefore, while analysts think the stock is undervalued, the market is favoring small-cap stocks. And it could easily send the stock lower after earnings if Amazon’s results aren’t picture-perfect.
How I Would Trade Amazon
I believe it’s too risky to bet on Amazon’s stock rising after earnings. Conversely, I do think that if the market sends it lower, a nice buying opportunity will present itself.
Currently, Amazon trades at just below 20x enterprise value/earnings before interest, taxes, depreciation and amortization (EV/EBITDA). This is well-below its historical average multiple of around 30x EV/EBITDA.
If shares fall by 10% post earnings to about $165 and Amazon earns the analysts’ estimated $32.7 billion in EBITDA this quarter, it would make its new EV/EBITDA about 15.66x. That puts its multiple similar to that of a retail competitor like Walmart (NYSE:WMT) and discounts AWS’ high-margin and retail businesses.
Data from S&P Capital IQ / Chart by Michael Que.
Before earnings, I would be willing to sell cash-secured puts on Amazon’s stock at a strike price of between $160 to $170 and take in the premiums. If the stock does fall below those prices, I would be happy to buy Amazon stock at those levels since it would be trading at what I believe to be a bargain.
Below are a few issues that could decide the stock’s direction post earnings.
AWS and Rising Capital Expenditures Could Disappoint Investors
Amazon’s capital expenditures have increased significantly in recent years and likely more than people expected from a mature company. This is primarily due to its investments in generative AI, in addition to more efficient fulfillment centers, advertising and content for Amazon Prime.
A majority of this money is going into AWS, which means any slowdowns or weaknesses would be met with sell-offs. I wrote an article on AWS’s weakness right before the stock slid from its $200 high. Additionally, Goldman Sachs called out the AI hype due to the lack of return on investment that companies are seeing from generative AI.
AWS could disappoint this quarter and is one of the reasons why I think even up to a 10% share price decline could be in the cards after earnings.
Decreased Consumer Spending Could Hurt Amazon’s Marketplace
There is a consensus belief that consumers are feeling the pinch in their pockets after years of high interest rates and hot inflation. For Amazon, this is showing up as a larger percentage of people using buy now, pay later (BNPL) and comparing prices at other retailers.
Almost 40% of Amazon’s revenue still comes from operations related to its market place. If consumer spending proves weaker than expected, there’s certainly a strong reason for the stock to trade lower.
On the other hand, Amazon’s demographic is primarily financially stable households which gives it more protection against slumping consumer spending.
My Verdict on Amazon’s Earnings
Personally, I don’t have confidence to purchase Amazon stock right now because of the negative sentiment surrounding big tech and the potential weaknesses. However, I’m prepared to buy AMZN if the market sends the stock down to a point where I consider it to be undervalued. And that could potentially happen later this week.
On the date of publication, Michael Que held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.