What happened
Broader market indexes were decidedly lower on Monday, as the market braced itself for a busy week of tech earnings and economic news. The Federal Reserve Bank is set to meet later this week to plot a course for interest rate increases, and some of the biggest technology companies are on deck to release their quarterly financial reports.
Furthermore, analysts are beginning to hedge their bets ahead of earnings, dropping new opinions about two technology stalwarts. Taken in total, this suggests investors are a bit nervous about the overall state of the economy and what it means for these upcoming financial reports.
With that as a backdrop, shares of Amazon (AMZN -2.56%) declined 1.4%, Alphabet (GOOG -1.10%) (GOOGL -1.23%) slipped 2%, and Atlassian (TEAM -1.06%) fell 2.8%, as of 12:38 p.m. ET.
Image source: Getty Images.
So what
The Fed is gearing up for the January meeting of the Federal Open Market Committee, scheduled for Tuesday and Wednesday, to decide if there will be any change in the pace and tenor of its campaign of rising interest rates. After numerous half-point increases, Wall Street is hoping that recent economic reports, which suggest inflation is easing, will prompt the Fed to raise rates by just a quarter percent. If that is indeed what happens, it could signal to investors that there's a light at the end of the tunnel -- and it isn't a train.
The central bank uses interest rates to cool high inflation. When the Fed raises and borrowing becomes more expensive, consumers and businesses tend to spend less. This helps to cool the overheated economy, which -- in turn -- causes prices to fall. Several recent economic indicators show that the Fed's campaign of rising interest rates is beginning to have the desired effect, which could influence its interest rate decision on Tuesday.
Perhaps as importantly, Amazon, Alphabet, and Atlassian are each set to release their latest earnings reports after the market close on Thursday. Given the uncertainty regarding the state of the economy and overall headwinds, investors are a bit jittery about what the results will reveal.
Now what
Analysts have been sharpening their pencils and consulting financial models in order to make their final adjustment ahead of Amazon and Alphabet's earnings releases:
- Amazon is the victim of dueling analysts today. Credit Suisse analyst Stephen Ju maintained his outperform (buy) rating on Amazon, while simultaneously raising his price target from $142 to to $171. This represents potential gains of 67% for investors. Ju believes Amazon will be able to lower the shipping costs born by its e-commerce business by increasing delivery efficiencies.
- At the same time, Barclays analyst Ross Sandler lowered his price target from $140 to $130, while maintaining an overweight (buy) rating on the shares ahead of the fourth-quarter results. Sandler cited an industrywide slowdown in cloud computing, but overall sees a "solid backdrop" for Amazon stock.
- Alphabet was also the subject of analyst scuttlebutt. KeyBanc analyst Justin Patterson lowered his price target on the stock from $118 to $117, while maintaining an overweight (buy) rating on the shares. He fears ad budgets could remain pressured beyond mid-year, which will weigh on Google's digital advertising and adtech businesses.
It's telling that even as analysts' cut their price targets, they maintained buy ratings on these stocks, which speaks to the long-term viability of these investments.
Furthermore, Amazon, Alphabet, and Atlassian are all selling at historically low valuations. Atlassian is trading for roughly 10 times next year's sales, its lowest price-to-sales ratio since early 2016. At 3.7 times next year's sales, Alphabet hasn't been this cheap since 2014. Amazon stock looks particularly appealing at this point, at roughly 1.6 times next year's sales -- its lowest price in decades.
To give these numbers context, most experts agree that a reasonable price-to-sales ratio is between 1 and 2. These valuations provide forward-looking investors with a three to five year outlook the opportunity to buy solid technology stocks at discounted prices.
