Amazon ( AMZN 1.11% ) announced its Q3 results after the market close last Thursday, and by pretty much every measure it reported another blowout quarter. The company posted revenue of $96.1 billion, up 37% year over year and soaring past analysts' consensus estimates of $92.7 billion. It also eclipsed management's forecast, which topped out at $93 billion.
Furthermore, the e-commerce giant generated impressive bottom-line growth, with operating income of $6.2 billion, ahead of the high end of its guidance range of $2 billion to $5 billion. This resulted in earnings per share of $12.37, crushing analysts' consensus estimates of $8.87 per share.
Given the company's stellar performance, why is Amazon stock falling?
Multiple factors at play
It's important to put Amazon's stock performance in recent days in the context of the bigger picture. Going into its financial report, Amazon shares had gained 74% compared to just a 2% rise for the S&P 500 and a 25% gain for the Nasdaq Composite.
The technology sector, which has been leading the market this year, has been pressured over the past several days, as a number of states and countries are reinstituting coronavirus lockdowns. Investors are clearly concerned that the rising number of COVID-19 cases will have a negative impact on the economy and threatens stock gains in the near future.
What Amazon had to say
In Amazon's earnings release, CEO Jeff Bezos said, "We're seeing more customers than ever shopping early for their holiday gifts, which is just one of the signs that this is going to be an unprecedented holiday season."
However, the pandemic is also expected to weigh on the bottom line during the fourth quarter. Amazon is forecasting operating income in a range of $1 billion to $4.5 billion, which includes about $4 billion in COVID-19-related costs. That would represent a notable decline from the $6 billion in operating profits in Q3.
Additionally, Amazon forecast revenue in a range of $112 billion to $121 billion, representing year-over-year growth of between 28% and 38%. While such an increase would be impressive, it would also mark the second successive quarter of decelerating revenue growth, and investors are clearly thinking the temporary boost from the pandemic is beginning to taper off.
While that may be true, it's important to look at the big picture.
Two large and growing markets
Coming into 2020, online purchasing still represented just a small amount of overall spending, though it's since gotten a boost from the pandemic. To close out 2019, U.S. e-commerce represented just 11% of total retail sales, but had risen to 16% by the end of Q2, a 44% jump from the prior-year quarter. That still leaves a large addressable market yet to be conquered. At the same time, Amazon continues its international expansion.
Then there's cloud computing. The overall cloud computing market was valued at $266 billion in 2019 and is expected to expand at a compound annual growth rate of 15% until 2027, resulting in an estimated addressable market of more than $800 billion, according to Grand View Research.
Amazon Web Services (AWS) is on track to generate about $44 billion this year, giving the tech giant plenty of opportunity for future growth.
Amazon stock could hit $5,000 from here
While e-commerce and cloud computing are the most obvious growth engines for Amazon, there are a number of other areas of the business that represent compelling opportunities for future gains. In the wake of the company's strong third-quarter performance, one analyst believes the stock could surge as much as 65% in the coming year.
Needham analyst Laura Martin currently has a price target of $3,700 on Amazon, but believes the bull case could be much stronger. She said the company has "several hidden value multipliers that suggest it is worth between $4,500 and $5,000 a share," citing $600 billion in media assets. The analyst also suggested its digital advertising business is another undervalued segment. "Ad revenue grew to nearly $5B in [the third quarter], suggesting [Amazon] is hiding a business worth about $500B in the public markets in its other sales line," said Martin.
A long-term view is needed
While it's hard to predict what will happen over coming few quarters, there's little doubt Amazon is positioned to prosper over the longer term. The company is the undisputed leader in cloud computing and dominates the U.S. e-commerce landscape.
Given the multiple catalysts, and with so many ways to win, Amazon is poised to continue its winning ways.