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Amazon Stock Could Rise Above $2,000 and Then Plummet

Will Healy

Investors anxiously await first-quarter results from Amazon (NASDAQ:AMZN) which reports earnings today after the bell.  After dropping tremendously last fall, Amazon stock has rebounded. It now trades within 10% of the all-time high it reached last September.

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Since AMZN usually beats estimates,  the Q1 results will probably be good. The earnings could even send Amazon stock back to its all-time high. However, the near-term future of AMZN stock will likely hinge more on what happens  after the earnings are released than on the report itself.

Expect Much Higher Revenue, Earnings

Wall Street analysts, on average, predict that AMZN’s first-quarter earnings per share will come in at $4.72. If AMZN meets that consensus estimate, , its EPS jumped 44.3% versus the same quarter last year. AMZN’s revenue also looks poised to rise at least 10%. Analysts’ consensus estimate for AMZN’s  revenue for the quarter is $59.65 billion , representing a year-over-year  gain of 16.9%. On average, Wall Street analysts expect AMZN’s profit to jump 36.2% this year and 45% in 2020.

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The owners of Amazon stock have become increasingly interested in the company’s advertising business. Some view the  business as a threat to both Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Facebook (NASDAQ:FB). Amazon Echo also controls more than 60% of the smart speaker market. Furthermore, Amazon’s retail operations continue to generate high revenues and eye-catching headlines, but they are not very profitable.

Most of the company’s earnings continue to come from Amazon Web Services (AWS), the company’s cloud business. In Q4, AWS generated only $7.4 billion of AMZN’s revenue of $72.4 billion. However, AWS accounted for $2.17 billion of the company’s Q4 profit of $3.03 billion.

A Key Level for Amazon Stock Is $2,050

If the previous quarters offer any indication, AMZN tends to beat earnings estimates by a wide margin. I see little reason to expect anything different today. Also, AMZN stock has increased by about 45% since hitting its December low. Given that factor alone, I expect the equity to rise after the company reports its earnings. I believe Amazon stock will retest its 52-week high of $2,050 per share, an increase of about 7.5% from its current price of just over $1,900 per share.

I see $2,050 as a critical level for Amazon stock,. I think if it can break through that level, it will continue to trade at a premium valuation. However, at the $1,900 level, its forward price-earnings  ratio stands at 47.8, and its current PE ratio is just under 95.

AMZN’s top position in the cloud industry helps Amazon stock command a higher multiple than its peers such as Microsoft (NASDAQ:MSFT) or Alibaba (NYSE:BABA). But AMZN stock appears cheap compared to emerging cloud companies such as Twilio (NYSE:TWLO). Driven by its rapidly expanding cloud business, Amazon’s profit growth could enable Amazon stock to continue trading at its current, elevated level.

Still, the bull market has entered its 11th year. Moreover, during last year’s fall swoon in tech equities, we saw Amazon stock lose more than one-third of its value in less than four months. If market sentiment again turns negative, AMZN stock could easily drop by the same amount again.

Concluding Thoughts on Amazon Stock

Earnings will likely take Amazon stock back to the $2,050 per share level. What happens afterward will probably determine the subsequent  direction of Amazon stock.

AMZN should continue its pattern of beating analysts’ consensus estimates, making investors more positive towards AMZN stock and propelling Amazon stock back to $2,050.

Investors’ subsequent reaction will likely determine AMZN’s near-term direction. If the shares remain above that level, I think Amazon stock will rise further.

However, if AMZN stock falls, investors may start to care about its valuation and again take the equity downward.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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