The bear market is not officially over, but it looks like the bears are going back into hibernation.
After the worst first half of the year in more than 50 years, the S&P 500 is up 13% since June 30, setting an 18% gain since it bottomed on June 17. There are a number of reasons for the recovery. Inflation and oil prices are falling. The labor market remains strong. Consumer confidence is recovering and corporate earnings were solid in the second quarter.
Among the recent pickup winners is Amazon (AMZN 0.74%), which is up more than 40% from its June bottom, helped by a stock split, improving consumer sentiment, a strong second-quarter earnings report and two surprise acquisitions, One Medical and iRobot.
After falling nearly 50% from its peak last year, investors may be wondering if FAANG stock can maintain that momentum. From its current price, rising to $200 would imply another 40% gain.
The road to $200.
Amazon’s second-quarter earnings report helped make the stock’s return to $200, as a number of tailwinds emerge to keep gaining. After revenue growth slowed in the first half because of difficult comparisons to 2021, when e-commerce growth was strong, the company expects revenue growth to accelerate to 13%-17% in the third quarter from 7% in the first half. On a constant currency basis, it is calling for 17% to 21% growth in the current quarter.
Amazon incurred $5.2 billion in operating losses in its e-commerce segments during the first half, but has been generally profitable in recent years and should return to overall profitability, especially with the help of Prime Day in the third quarter and the holiday season in the fourth and as the company grows in the excess capacity it built during the pandemic. The company is also charging an extra $0.35 for each item it delivers to sellers in its marketplace, which is likely to lead to profits as sellers have few alternatives but to pay. It also shows that Amazon has pricing clout in e-commerce with both its customer base and the millions of sellers who work on its platform.
While e-commerce is getting a lot of attention in the media and among customers, its cloud-based business infrastructure, Amazon Web Services (AWS) has been a major profit driver for years and continues to grow at an impressive rate. In the second quarter, AWS revenue grew 33% to $19.7 billion from 29% operating margin. Demand for cloud services remains strong and should continue to drive Amazon’s profits forward, making it the most important number for investors to watch.
The question is when, not if.
Given expected earnings growth from e-commerce and cloud computing, as well as companies such as advertising, Amazon will almost certainly hit $200 a share. The key question facing investors, however, is when, and that will depend on the behavior of the broad market. If the bounce we’ve seen in recent weeks continues, Amazon could hit $200 before the end of the year. After all, this stock was trading at $188 last year, so $200 represents only a small increase from the previous peak.
If inflation persists, interest rates continue to rise, and consumer sentiment declines, Amazon stock is likely to remain under pressure. This is a cyclical business that directly affects consumer discretionary spending and the health of the economy as a whole.
Regardless of what happens in the short term, though, Amazon should eventually hit $200. The company continues to grow its retail market share, build leverage in its marketplace, grow its cloud business and introduce new technology. It’s a good bet to beat the market at the current price.