It is the biggest about-face that I’ve made in 2016. Up until a few months ago, I considered Amazon.com Inc. (AMZN) a “bubble stock” that investors should avoid at all costs. However, recently there have been developments that have encouraged me to change my mind. In this special feature, I’ll review the many reasons why you may want to consider buying AMZN before its next earnings announcement.
Amazon dominates the online sale of consumer products across North America, and much of the world. If you’ve ever shopped on Amazon.com, you know that you can purchase pretty much anything through its website, and in many cases, you can get free shipping while doing so.
Along with online retail, Amazon also manufactures and sells electronic devices, like Kindle e-readers and tablets, smartphones and voice controlled speakers. The company also offers cloud storage services, which allows its users to store unlimited photos, videos, files and documents remotely. And that’s not even mentioning Amazon’s burgeoning drone delivery business, or its entertainment segment.
Throughout 2015 and into early 2016, AMZN was trading at obscenely high multiples, and it didn’t have the fundamentals to back the stock’s meteoric rise in 2015. And I’m glad that I was so outspoken against Amazon; the company ended up posting a massive 35.9% earnings miss for Q4.
However, the company’s recent first-quarter report caused me to reconsider the stock. For starters, Amazon posted a whopping 84.5% earnings surprise, and a sizeable sales surprise. The company also offered a sunny second-quarter outlook, with a sales target of $28 billion to $30.5 billion, or between 21% and 32% annual sales growth.
As a result, the stock’s forward P/E was brought down to a more reasonable level (to 72). While it’s still on the pricier side, I’m willing to pay more for monopolistic plays like AMZN. We’ve also seen some dramatic upward EPS revisions lately, which suggests that Amazon has the earnings growth to support its high (but not as high as before) P/E.
For the current quarter, Amazon is expected to post upwards of 478% earnings growth, and 27% sales growth. Then again, with Amazon’s strong track record of earnings surprises, the company could do even better. This is why I have July 28 circled on my calendar—it is when Amazon is expected to post its second-quarter results.
For these reasons and more, I consider AMZN an A-rated Strong Buy.