Amazon and RH have been highlighted as Zacks Bull and Bear of the Day
For Immediate Release
Chicago, IL – December 19, 2023 – Zacks Equity Research shares Amazon AMZN as the Bull of the Day and RH RH as the Bear of the Day. In addition, Zacks Equity Research provides analysis on American Water Works AWK, CenterPoint Energy (CNP) and Granite Construction (GVA).
Here is a synopsis of all five stocks.
Bull of the Day:
Amazon’s rebound kicked back into high gear following its big beat and raise third quarter at the end of October, with AMZN shares up roughly 85% in 2023.
The e-commerce and cloud computing giant’s comeback has been powered by its commitment to boosting earnings and transforming into a mature tech firm that posts impressive top-line growth and massive, constantly expanding profits.
Some investors might be worried they ‘missed out’ on Amazon’s rally and could be afraid about what’s next for the so-called Magnificent Seven tech stocks. There could be some selling and choppiness in the near term for the market and big tech following the huge rally to end a strong year.
Yet, Amazon trades solidly below its all-time highs and its average Zacks price target, and its valuation levels have improved as it focuses on the bottom line. Amazon’s various businesses are also more entrenched in the economy than ever.
Multiple Growth Engines
Slowing cloud growth and higher rates hit Amazon stock hard in 2022—alongside most of the technology sector. Thankfully, rates are coming down and AMZN is focused on profits and maximum efficiency under CEO Andy Jassy.
Better yet, Amazon still runs the world’s largest cloud-computing business. Cloud computing is a key pillar of the modern economy and is growing in importance.
The combination of steady cloud computing growth and a concentrated effort on boosting earnings now and forever is the pitch that breathed fresh life into Amazon stock in 2023 and likely will for years to come.
AWS sales climbed 12% in the third quarter, accounting for around 16% of total company revenue. The high-margin segment is eclipsed by its far-large e-commerce unit in terms of overall sales. Yet AWS accounted for over 60% of Amazon’s operating income last quarter and is poised to remain Amazon’s profit hub going forward. Amazon reportedly held 32% of the cloud computing market last quarter vs. Microsoft’s 22% and Google’s 11%.
Amazon is attempting to improve AWS margins by rolling out more in-house chips. Amazon is actively introducing AI-focused efforts to attract customers to spend more as everyone races not to get left behind on tech's new frontier. On top of that, Amazon is expanding its collaboration with Nvidia for cutting-edge chips.
On the e-commerce front, Amazon is benefiting from its transition from a single national fulfillment network in the U.S. to eight distinct regions. Amazon currently holds nearly 40% of the total e-commerce market share in the U.S., blowing away second-place Walmart’s 7%. The company is also growing its digital advertising segment. The unit climbed 25% in Q3, marking the largest YoY gain on a percentage basis.
Amazon is also aiming to boost its Prime segment by rolling out more live streaming entertainment efforts. For example, new reports say Amazon is in talks to invest in regional sports standout Diamond Sports Group.
Near-Term EPS & Revenue Outlook
Current Zacks estimates call for Amazon to post 11% revenue growth in 2023 to pull in $570.75 billion and then climb 12% higher next year to reach $637.05 billion. This would see the firm add a projected $124 billion to the top line between FY22 and FY24, which is more than retail and e-commerce firm Target made in FY22 ($109 billion). These figures mark improved expansion from its 9% revenue growth last year.
Amazon’s earnings guidance keeps getting better. AMZN’s consensus fourth quarter EPS estimate has jumped by 15% since its Q3 report, with its FY23 estimate 20% higher and 13% better for FY24.
Amazon is projected to post 276% earnings growth in 2023, climbing from $0.71 to $2.67 a share. AMZN is then expected to boost its earnings by another 32% next year to reach $3.53 per share.
On top of that, its most accurate/most recent estimates for FY23 and FY24 came in above consensus. Amazon’s overall improved earnings outlook helps it land a Zacks Rank #1 (Strong Buy) right now. The recent positivity is part of a prolonged stretch of surging earnings outlooks that began in early 2023.
Performance, Technical Levels & Valuation
Amazon stock has climbed 665% in the last decade to blow away the Zacks Tech sector’s 250%. Despite this run, Amazon is down 4% in the last three years vs. the Zacks Tech sector’s 22% climb.
AMZN has surged 84% in 2023 to top Microsoft’s 55% and Apple’s 51%. Unlike Apple, MSFT, and Nvidia, Amazon hasn’t posted new all-time highs in 2023. Amazon currently trades around 17% below its all-time highs and its average Zacks price target marks 16% upside to Monday’s levels.
Amazon hit new 52-week highs on Monday, having found support at its 21-day moving average recently. AMZN shares have also retaken their very long-term 50-week moving average.
On the valuation front, Amazon trades over 65% below its highs and at a 45% discount to its 10-year median at 42.8X forward 12-month earnings. This is still clearly very ‘pricey’ for many investors. But there are signs that Amazon’s forward earnings multiple will keep coming down.
Amazon’s PEG ratio, which factors in its earnings growth outlook, marks a 25% discount vs. the Zacks tech sector at 1.5. Better still, Amazon’s PEG ratio sits near its lows over the last 10 years.
Bottom Line
Amazon is a powerhouse in multiple key areas of the economy that aren’t going out of style. Therefore, investors might want to buy Amazon as a straightforward investment into mega-cap technology and its growing sway over our lives and the market.
Bear of the Day:
RH, once known as Restoration Hardware, posted a surprise quarterly loss on December 7 and provided downbeat guidance.
The high-end home furniture retailer pointed to higher mortgage rates and other headwinds as reasons for RH’s rough near-term outlook.
RH’s Story
RH is a luxury-centered furniture and home décor powerhouse that has thrived in a changing retail landscape by keeping it old-school. The company still sends out massive catalogs and it has opened large, high-end stores, many with accompanying bars and restaurants in cities from Chicago to New York.
RH is even slowly attempting to push its way into the world of hotels, homes, architecture, and more. RH grew its revenue at a rather impressive rate between its 2012 IPO and 2021, including blowout results in FY21, driven by the booming housing market.
RH’s revenue then slipped about 4.5% last year as the housing market cooled and consumers focused on experiences after they spent a prolonged period buying tables, couches, and more.
RH’s third quarter FY23 revenue fell by nearly 14%. The company’s adjusted operating margin also came in below expectations “due to higher than anticipated expenses, including international openings as well as costs related to our pending acquisition of the New York Guesthouse property and unsuccessful efforts to secure the iconic One Ocean Drive Miami Beach location.”
RH posted an adjusted loss of -$0.42 per share in Q3 vs. our +$0.91 a share Zacks estimate. The firm’s downbeat earnings guidance has seen its consensus estimate slide by 36% for the fourth quarter and 18% for both FY23 and FY24.
RH’s most accurate EPS estimates came in below consensus. All of RH’s downward earnings revisions help it land a Zacks Rank #5 (Strong Sell) right now. The nearby chart shows that RH’s earnings outlook has been fading for well over a year now.
Bottom Line
RH’s adjusted earnings are expected to slide by 60% YoY on 15% lower revenue. RH’s downbeat outlook is due in part to the slowing housing market. The company also said that the “home furnishings market has become increasingly promotional, and we believe that will create a mix shift towards clearance products, pressuring gross margins.”
RH shares are trading over 55% below their peaks. The stock also currently trades under its 200-week moving average.
RH is rather heavily shorted at about 17% of the float. All in, it might be best to avoid RH stock for now and look for other firms not tied directly to the housing market or big-ticket retail items.
Additional content:
3 Rate-Sensitive Stocks to Gain as Fed Sounds Dovish for 2024
As widely anticipated, the Federal Reserve held interest rates steady in its latest policy meeting and signaled multiple rate cuts are coming in 2024, with more to be followed in 2025.
Utility and real estate players cheer the Fed’s dovish stance as they stand to benefit from the central bank’s motive to lower the policy rate soon.Thus, astute investors should invest in stocks such as American Water Works, CenterPoint Energy and Granite Construction as of now for solid returns.
Fed Signals Rate Cuts in 2024
The Fed has held interest rates unchanged at 5.25% to 5.5% for the third successive meeting. The Fed also hinted at three rate cuts in 2024, with further rate cuts expected in 2025 as inflation cools down amid sturdy economic growth.
The third-quarter GDP has already increased at the fastest annual rate in two years as consumers opened up their wallets to splurge on discretionary items.
Inflationary Pressure Subsides
Conversely, inflation came in line with estimates, allowing the Fed to keep interest rates unaltered. The consumer price index (CPI) increased 0.1% month over month in November, while the annual rate went up 3.1%. However, year over year, the CPI declined following an uptick of 3.2% in October.
The core CPI that eliminates volatile energy and food prices was up 0.3% month over month and 4% from a year ago. Both data were in line with market’s expectations and changed little from a month earlier.
Rate-Sensitive Stocks to Gain
With interest rate cuts expected soon, companies from the utility and real estate sectors are poised to gain. Utilities, for instance, are capital-intensive businesses, which compels them to rely on third parties for funding. Thus, they have a high level of debt. In a low-interest-rate environment, they can pay off their debt and register profit.
It's also worth pointing out that in case of rising interest rates, credit ratings of utility companies may go down, and they will find it hard to get lenders. Moreover, they can’t borrow at realistic rates, eventually leading to an increase in operating costs.
Interest rate hikes are also a drag on real estate activities. The borrowing costs of real estate projects of construction companies increase amid higher interest rates and impact profit margins.
Top 3 Choices
We have, thus, selected three stocks that are positioned to benefit from the Fed’s intention to slash interest rates. These stocks flaunt a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
American Water Works is a water supply and wastewater service provider. The company currently has a Zacks Rank #2.
The Zacks Consensus Estimate for its current-year earnings has increased 0.4% over the past 60 days. AWK’s expected earnings growth rate for the current and next year is 6.9%.
CenterPoint Energy provides electric transmission & distribution, natural gas distribution, and competitive natural gas sales and services operations. The company presently has a Zacks Rank #2.
The Zacks Consensus Estimate for its current-year earnings has increased 0.7% over the past 60 days. CNP’s expected earnings growth rate for the current and next year are 8.7% and 8%, respectively.
Granite Construction is the nation’s largest infrastructure contractor and producer of construction materials. The company at the moment has a Zacks Rank #1.
The Zacks Consensus Estimate for its current-year earnings has increased 9.9% over the past 60 days. GVA’s expected earnings growth rate for the current and next year are 35.1% and 37.5%, respectively.
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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
CenterPoint Energy, Inc. (CNP) : Free Stock Analysis Report
American Water Works Company, Inc. (AWK) : Free Stock Analysis Report
RH (RH) : Free Stock Analysis Report
Granite Construction Incorporated (GVA) : Free Stock Analysis Report
