What Happened?
Shares of cloud computing and online retail behemoth Amazon (NASDAQ:AMZN) fell 3.5% in the morning session after the major indices declined, with the Nasdaq down 1.9%, while the S&P fell 1.12% as markets reined in some of the post-election optimism. The decline follows remarks from Federal Reserve Chair Jerome Powell indicating that the Fed's decision-making committee is not in a hurry to cut interest rates. Consequently, investors have reduced their expectations for another 0.25% rate cut in December 2024.
Recent inflation data has renewed the debate of how much more rates need to come down and what the cadence of future cuts should be. Specifically, the Consumer Price Index (CPI) for October 2024 increased by 0.2% month-on-month, while headline inflation stood at 2.6% year-on-year. The latter is getting closer to the Fed's 2% target.
As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. The result of lower interest rates, all else equal, is higher stock valuations. This is especially true for higher-growth stocks, such as those in the technology sector, where the current value depends more on cash flows many years out in the future.
Separately, Bloomberg data revealed that some hedge funds have reduced their holdings of Amazon shares compared to new positions initiated during the quarter. This trend aligns with a broader narrative of investors rotating out of large-cap technology stocks in favor of other opportunities. After the Magnificent 7 drove the markets for much of 2023 into 2024, a movement away from them has transpired. After the initial drop the shares shed some of the losses and rose to $202.41, down 4.3% from previous close.
The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Amazon? Access our full analysis report here, it’s free.
What The Market Is Telling Us
Amazon’s shares are very volatile and have had 29 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 14 days ago when the stock gained 7.6% on the news that the company reported impressive third-quarter earnings. Amazon blew past analysts' EPS and operating income expectations during the quarter, giving credence to the argument that the company can be much more profitable and sustain high margins going forward. Operating profit guidance for next quarter also came in ahead.
Taking a closer look at the operating segments, AWS (Amazon Web Services), grew 19% year on year, in line with analysts' estimates, while operating margin beat handily. Notably, AWS reached a revenue run rate of $110 billion amid growing demand for cloud and AI services.
Advertising revenue, which is a promising growth driver, also exceeded Wall Street's expectations. AMZN noted that the advertising business recorded strong margin expansion, helping to make sense of the improvements in profitability recorded in the quarter. It wasn't a perfect quarter, as revenue guidance for the next quarter was underwhelming. Given the excitement around margins, though, the market is overlooking the revenue guidance shortfall.
Overall, we think this was a very good quarter showing that there might need to be more bullishness around Amazon's long-term margin structure.
Amazon is up 35% since the beginning of the year, and at $202.41 per share, it is trading close to its 52-week high of $214.10 from November 2024. Investors who bought $1,000 worth of Amazon’s shares 5 years ago would now be looking at an investment worth $2,327.
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