Dear Reader,
Welcome back to our latest edition of Market Insights with Sanjeev Kaushik.
In this edition, we will be providing a comprehensive analysis of Amazon.com Inc. (NASDAQ: AMZN). We will be examining its financial performance to assess future outlook for the company. Read on to find out if the retail behemoth is still a worthy investment?
Next, we will study NVIDIA Corporation (NASDAQ: NVDA) and to evaluate if investors can still find growth in NVIDIA after its 12x returns since October 2022 bottom! We’ll dissect their growth areas and valuation to help you make informed investment decisions.
So let’s dive right into it..
Today at a glance:
- Stock Analysis – Amazon.com Inc. (NASDAQ: AMZN)
- Is NVIDIA Stock Still a Great Buy?
- From the Vault – For Options Traders
Amazon.com Inc. (NASDAQ: AMZN)
Why we are bullish on this Mega Cap Stock?
Amazon.com Inc. (AMZN) kicked off its Prime Day event with a bang, reporting a nearly 12% increase in sales during the first seven hours compared to the same period last year, according to Momentum Commerce. This promising start sets the stage for what could be a stellar Q3 2024 earnings report for Amazon.
Analysts are buzzing with optimism as Amazon raises its 2025 GAAP Operating Income estimate, now 8% above Street expectations. This suggests a potential boost to profit margins, a key area of focus for investors.
Three hot debates dominate the conversation leading up to the earnings release: the overall health of consumer spending, the prospects for operating income margins, and the future growth trajectory of Amazon Web Services (AWS) revenue.
Despite some challenges in the UK and Germany, Amazon’s eCommerce business remains robust, supported by positive industry checks and data points. There’s significant potential for Amazon to exceed operating income margin expectations in 2025, thanks to higher retail margins and a stronger contribution from advertising. A favorable long-term view on international margins and solid AWS profitability further bolster this outlook.
AWS, Amazon’s crown jewel, is expected to see a resurgence in revenue growth throughout 2024, fueled by the increasing adoption of AI workloads. This optimism has led analysts to raise Amazon’s 12-month price target from $225 to $250, reiterating a strong Buy rating. Over the past year, Amazon shares have outperformed both the S&P and Nasdaq, driven by rising profit estimates despite a compression in multiples. The new price target suggests Amazon will trade at 30 times the updated $8.29 2026 GAAP EPS estimate, with a PEG ratio just over 1.0x, reflecting nearly 30% year-over-year EPS growth in 2026.
Margin analysis reveals ample room for retail margin expansion, driven by operating leverage on fixed retail assets, reduced cost to serve per unit, moderated inflation rates, and high-margin contributions from Prime subscription fees and seller fees.
Additionally, Amazon’s growing scale in advertising is expected to significantly boost consolidated operating income margins. Even conservative models of 2025 AWS margins, which account for substantial expense reacceleration, leave room for upside surprises if AWS revenue surpasses forecasts.
Online Retail Market – The Big Picture
The global online retail market, valued at USD 1,987.25 billion in 2023, is projected to reach USD 4,289.66 billion by 2031, growing at a CAGR of 10.23% from 2024 to 2031. This growth is driven by advancements in logistics and last-mile delivery technologies, such as automated warehousing, drone deliveries, and autonomous vehicles.
The online retail sector, encompassing services from companies like Amazon, Walmart, Alibaba, and eBay, involves the buying and selling of goods and services over the internet. It provides consumers with the convenience of shopping from home, access to a wide variety of products, and features like personalized recommendations and secure payment gateways. The rise of online retail is significantly influenced by technological advancements and changing consumer preferences, moving away from traditional brick-and-mortar stores.
Global Online Retail Market Forecast (Source: Kings Research)
Key players in the online retail market are investing in technologies such as Artificial Intelligence (AI), machine learning, and big data analytics to improve customer experience and operational efficiency. They are also focusing on expanding product offerings and geographic reach, building robust logistics networks, and incorporating eco-friendly practices. Partnerships and acquisitions are strategies used to strengthen market positions and diversify product portfolios, helping companies remain competitive in a rapidly evolving market.
The rise of social commerce is another significant trend reshaping the online retail industry. Social media platforms like Facebook, Instagram, and TikTok are evolving into dynamic marketplaces where users can discover and purchase products directly within the platform. This trend leverages high engagement levels and user bases of social media, integrating shopping with social interactions and providing retailers with powerful targeted marketing opportunities. Social commerce is enhancing the shopping experience for consumers, contributing to the growth of the online retail market.
How Amazon has performed so far?
Amazon’s stock price has surged by 132% since the beginning of 2023, outperforming the S&P and NASDAQ indices. This increase is due to higher profits, with expected 2025 earnings estimated to be 8% above the current consensus.
AMZN has outperformed the S&P and NASDAQ in the past 18 months.
The stock’s valuation has become more attractive, with its EV/EBIT (Enterprise Value to Earnings Before Interest and Taxes) multiple decreasing from 49x to 33x. Goldman Sachs also remains positive about Amazon, anticipating further profit growth, especially in retail margins. They also consider their predictions for Amazon Web Services (AWS) margins to be conservative, suggesting that there could be positive surprises if AWS revenue grows faster than expected or if reinvestment slows down.
Why We Like AMZN?
Company Fundamentals
Understanding Amazon’s complex business requires considering various facets. Here’s a breakdown of some important factors for a comprehensive analysis:
Retail Profitability
AMZN’s retail profitability has been expanding significantly. They estimate a total company retail EBIT margin of 1.1% in 2024, rising to 3.0% in 2025. North American retail is expected to be the sole source of this profitability, with international retail still operating at a loss. Other reasons for the increase in retail profitability are:
- Operating leverage on fixed retail assets due to rising paid unit growth
- Lower cost to serve per unit driven by regionalization and fulfillment improvements
- Moderation in inflation of key input costs compared to 2021-2022 peaks
- High-margin revenue streams like Prime subscriptions and seller fees
AMZN’s retail gross margins expanded in 2023. (Source: Goldman Sachs)
Gross Margin Expansion
Retail gross margins expanded from 33% in 2022 to 37% in 2023, driven by leverage on merchandise costs and shipping cost reductions. Merchandise costs as a percentage of online stores revenue declined from 49% in 2018 to 39% in 2023.
What Experts are Saying?
Analysts that track the stock seem bullish on the stock’s potential with 54 out of 66 recommending buying the stock at current levels.
The highest target in the next 12 months assigned for the stock by the analysts is 353 signifying an up move of over 85% from the current levels.
Is NVIDIA Stock Still a Great Buy?
Your Nvidia Questions, Answered…
Among the Magnificent Seven stocks, Nvidia (NVDA) is the top performer in 2024, with a scorching 157% year-to-date return through July 12.
Nvidia stock tumbled 5.9% this week, at its 10-week moving average line, a key level to watch.
Goldman Sachs reiterated its Buy rating on Nvidia (NASDAQ:NVDA), maintaining a price target of $135. The firm’s positive stance on Nvidia is based on several key growth areas identified by the company, including the evolution of Generative AI (Gen AI) models, the build-out of sovereign AIs, and the company’s growth prospects at the Edge.
Growth Drivers for NVDA:
- Generative AI (Gen AI): Nvidia expects Gen AI models to become more complex, incorporating audio and video for broader use cases. This positions them well for growth in enterprise AI.
- Sovereign AI: Building AI infrastructure for specific government needs is a new opportunity. Nvidia’s capabilities and government relations could lead to significant revenue by 2025.
- Edge Computing: The deployment of computing power outside data centers aligns with Nvidia’s strengths in GPUs and existing customer base. This offers another growth avenue.
- Strong Market Position: Nvidia’s dominance in gaming GPUs and presence in areas like autonomous vehicles and robotics solidify their position in key tech trends.
Here’s Why We Think NVDA Is Still Worth It
- Price-to-Earnings (P/E) Ratio: The high P/E of 74.39 suggests investors anticipate significant future earnings growth.
- Revenue Growth: Impressive 208.27% growth in the last twelve months showcases market penetration and technological innovation.
- Gross Profit Margin: A strong 75.29% margin indicates profitability even during growth.
- TSMC Profit Surge: A key Nvidia supplier, Taiwan Semiconductor Manufacturing Co (TSMC), is set for a 30% profit increase due to high AI chip demand, which benefits Nvidia indirectly.
From the Vault
Poor Man’s Covered Call (Time-Diagonal Spread) is very popular among traders who prefer to purchase a long duration call instead of buying the entire lot of stock. It is considered to be a cheaper version of simply buying a stock and selling call against it
However, this strategy has its own pitfalls that a trader must avoid. In this video, we cover all the factors that influence the outcome of this strategy and what are the common mistakes you must avoid while entering into the trade.
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