Amazon Stock Price Prediction: Even At All Time Highs, Bulls Are Still Right About Amazon(AMZN)

Amazon Stock Forecast

Amazon.com, Inc. turned 20 and celebrated the occasion with Prime Day, where customers can get special deals on many of the offerings from Amazon’s web site. Besides the birthday of the company, Prime Day could also be considered a celebration of the success of the company. The stock price has climbed roughly 50% year to date, and it has continued to climb to new all-time highs. With the company’s earnings report coming up a week from Thursday, now is a good time to reemphasize why this company remains a strong investment opportunity.

Gross Profits Continue Climbing

Opinion on this stock is extremely split between bulls and bears with very little in between. The bears point to the lack of profits that the company has been able to generate in recent years. The lack of profits is especially upsetting to detractors because the company’s revenues continue to increase, growing at a steady pace over the past five years. However, this figure does not tell the whole story, as the company’s gross margins have also consistently improved over that time period.

Rev Vs. Prof

Figure 1. Source: YCharts

The bears’ case is understandable from a fundamental standpoint, as a company traditionally does its best to maximize the profits it can earn. They have argued that the spending is out of control and that Amazon is unable to turn its growing revenue into any material profit for its stockholders. But this strategy is precisely what makes the company so attractive going forward.

Retail Business Will Continue Growing

Much of the spending the company incurs is on its storage and distribution for its online retail business, in which it currently the market leader. Amazon is not stagnating in this business either, as it is constantly working on improving it. Amazon Prime, its membership program, offers free, speedy shipping for a $99 annual membership. Now, the company also offers free same day shipping in some key markets and investors can expect the company to expand this service going forward.

As this program expands, it will make more and more sense for customers to use Amazon’s services. Basically, the company is making the need to go to the store a thing of the past. Add in Amazon Dash and customers can get all of their household needs delivered to them with the simple click of a button. Spending on infrastructure to make such simple delivery possible will ensure Amazon a place in the retail business moving forward and continue to grow revenues from the service.

Current estimates show more than 40 million subscribers to Amazon Prime currently. In 2014, membership soared 53%. Besides the free shipping, members also get access to an array of other products, including an instant video streaming service and access to a library of kindle books and music. The video service in particular has eaten up much of the company’s profits, but services like these make prime customers more likely to keep the service.

This is what Amazon is betting on with its Prime Day sale. In order to get the discounts that the online retailer is offering, customers have to be prime members, but a 30-day free trial is available. Amazon believes that people who sign up for this service will like the service enough to become full, paying members.

Prime

Figure 2. Source: International Business Times

Getting customers to sign up for Amazon Prime is key to the business, and not just for the annual fee. Studies such as one from Millward Brown Digital show that customers who are signed up for Amazon Prime are much more likely to buy items from the online retailer. This is the beauty of the business model, as members feel they are getting more for their money by spending more money on Amazon’s site.

With Amazon Prime members surging last year and continuing to grow, revenue from this business segment will continue to jump and should have no problem beating expectations in the upcoming earnings report. Analysts are expecting the company to post a loss of $0.14 per share, but investors could be severely underestimating the growth from the retail business.

This should continue to grow by the end of the year, when the benefit of the current Prime Day sale takes effect. With Amazon continuing to improve its service and remaining the innovative leader, there is no reason to believe it will not be able to continue growing its revenue from this business.

Amazon Web Service Shows Model

One of the most successful businesses that Amazon has right now is its Amazon Web Service (AWS), which is the dominant force in the growing cloud market. Revenue from this business grew 49% year over year in the first quarter, and it has established itself as the top option for independent software vendors and businesses.

Amazon, which actually created the idea of public cloud infrastructure, has continued to separate itself from other cloud offerings. Research from Gartner, Inc. shows that Amazon now has ten times more capacity than all other players in the market, which is up from five times as much just last year. Indeed, it has established itself as the safe choice for enterprise applications, and it is on track to bring in $6 billion in revenue this year. Cowen Group believes that this could be $38 billion business for the company by 2020.

Growth like this is why Amazon’s strategy of spending for future growth is not as risky as it seems. Investors were concerned when the Amazon Fire mobile phone flopped, and that was certainly a misstep from Amazon’s management team. But Amazon is able to learn from mistakes like that and focus on areas where it can be a leader.

These two businesses alone will drive plenty of revenue growth in the future, making its current valuation justifiable. The ability to absorb mistakes with its retail business while expanding into other markets where huge growth is recognizable also leave plenty of unrealized upside potential.

Analyst Opinion

Analysts tend to agree with this overall bullish sentiment in the long-term. A number of firms have upgraded the stock recently, with analysts from UBS upgrading the stock to buy and setting a target price of $550, largely due to the increased spending coming from Prime customers. This helped the stock price jump to new all-time highs.

Analyst Opinion

Figure 3. Source: Yahoo Finance

Consensus opinion is also bullish on the stock, with analysts giving a consensus recommendation of buy according to Yahoo Finance. The current mean target for Amazon’s stock price is $473.53, and this amount should increase after earnings. At that point, analysts will update their models with better than expected earnings from retail.

Algorithmic Analysis

I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

Amazon Stock Forecast

I Know First has had success predicting the movement of Amazon’s stock price in the past. In this one-year forecast from July 13th, Amazon had a strong bullish signal strength of 77.31 and a predictability indicator of 0.45. In accordance with the algorithm’s prediction, the stock price increased 31.59% during that time.

Having explained how I Know First’s algorithm works, it is worthwhile to see if the algorithm agrees with the bullish fundamental analysis of the company. The one-month and three-month forecasts for Amazon are included.

Amazon stock forecast

Amazon has a bullish signal for both time horizons, indicating that the stock is currently undervalued. Over the predicted time horizons, the stock price will continue to climb, which is in agreement with the fundamental analysis. The Amazon Prime service will lead to larger growth from the e-commerce business than what analysts and investors alike are expecting in the upcoming earnings report, leading to the stock price climbing even higher.

Positive signal strength does not mean investors should automatically buy the stock. Dr. Roitman, who created the algorithm, created rules for entry for a stock such as Amazon. Using this trading strategy, an investor should buy a stock if the last 5 signal strength’s average is positive and if the last closing price is above the 5-day moving average price. When both of these conditions are met, it is a good time to initiate a position in the stock.

Conclusion

While opinion on this stock is likely to remain split based off of what investors prefer from their investments, the bulls are going to continue to reap the benefits from this rapid growth company. Bears can continue to harp on the lack of material profits for as long as they want, but they will continue to miss out on the massive gains that the stock earns for its investors. With Amazon Prime continuing to grow its membership base with innovative technologies and solutions for customers, it will continue to grow for the foreseeable future. With Amazon Web Services established as the go to cloud service with huge growth coming over the next five years and an experienced leadership team who can spot growth opportunities, the current valuation becomes quite modest considering the company’s future vision.