Amazon (NASDAQ:AMZN) has shown significant gains in 2024, with nearly 20% year-to-date (YTD) returns. However, Amazon stock is currently trading around 9% below its record highs, prompting investors to question whether the stock can maintain its upward trend as we approach the end of the year. Let’s dive into Amazon’s Q4 forecast to explore its growth potential and the market factors influencing its stock performance.

Amazon Stock and Its Rebound from Lows

Amazon stock peaked in early July but has not reached those levels since, largely due to mixed signals from its Q2 earnings. While Amazon surpassed profit expectations, it missed revenue targets and issued cautious guidance for Q3. Adding to the challenges, global market jitters around potential recession risks, combined with the unwinding yen carry trade after the Bank of Japan’s interest rate hike, added to AMZN’s volatility.

Despite these hurdles, Amazon stock has shown resilience, bouncing back from its August lows. While the Nasdaq Composite has yet to reclaim its highs, both the S&P 500 Index and the Dow Jones Industrial Average have surged, partly due to the Federal Reserve’s interest rate cuts. These cuts have contributed to easing market pressure and improving investor sentiment.

Federal Reserve’s Rate Cuts: A Boon for Amazon?

The Federal Reserve’s decision to lower interest rates is a positive factor for Amazon’s growth prospects. In 2022, rising costs due to multi-decade-high inflation significantly impacted Amazon’s profitability. With inflation cooling down and the Fed adopting a more accommodative monetary stance, there is more breathing room for discretionary spending. This trend could benefit Amazon’s e-commerce business, as lower interest rates tend to stimulate consumer spending.

For instance, other retailers like Costco (NASDAQ:COST) have seen a rise in discretionary spending, as reflected in their latest earnings report. This increase suggests that the retail sector is beginning to see a recovery in consumer activity, which bodes well for Amazon and other e-commerce players. While the chances of a recession are not completely off the table, the U.S. economy is currently on a trajectory that suggests a “soft landing.”

Amazon’s AI Growth and New Revenue Drivers

Amazon’s AI business is another strong growth driver. While the momentum of AI stocks has cooled, the technology remains integral to Amazon’s operations. Amazon Web Services (AWS), in particular, is seeing substantial benefits from the global surge in AI adoption. CEO Andy Jassy noted during the Q2 earnings call that Amazon’s AI business is experiencing a “multibillion-dollar revenue run rate,” showing strong growth potential even in its early stages.

Moreover, Amazon has diversified its revenue streams beyond e-commerce and AI. Advertising is expected to be a strong contributor to its bottom line, with reports indicating an increase in ads on Prime by 2025. Amazon Business, the company’s B2B platform, also shows promise, operating at a multi-billion-dollar gross revenue run rate. The company’s efforts to optimize costs, including its return-to-office policy, are aimed at improving operational efficiency and maintaining strong profit margins.

AMZN Valuation and Analyst Sentiment

At a forward price-to-earnings (P/E) ratio of 35.9x, Amazon’s valuation appears reasonable, especially when considering its anticipated double-digit revenue growth over the long term. Analysts project a 20.4% year-over-year increase in profits for 2025, which reinforces Amazon’s status as a growth stock with attractive potential.

According to analyst Youssef Squali of Truist, Amazon’s target price has been raised from $230 to $265, with a reiterated “buy” rating. Squali sees AMZN as trading at an attractive level, with a valuation of just 18 times cash flow from operations. Furthermore, Amazon has managed to maintain robust cash flows, generating $51.4 billion in free cash flow (adjusted for equipment finance leases) in the trailing 12 months ending in June.

Analyst Consensus and Q4 Outlook

Amazon has widespread support from Wall Street analysts, with 43 out of 46 rating it as a “Strong Buy” and the remaining three as a “Moderate Buy.” This makes Amazon one of the highest-rated stocks among the “Magnificent 7” tech giants. Amazon stock’s mean target price stands at $226.18, suggesting a 22% potential upside from its recent closing price, while Truist’s upper target of $265 implies a 43% gain.

Overall, the outlook for Amazon appears positive for Q4, with strong profit growth, diversified revenue streams, and healthy cash flows. While market conditions remain dynamic, Amazon stock shows potential for further rallying as it capitalizes on stabilizing growth, declining inflation, and increased consumer activity.

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