Marking its biggest one-day gain since December 2018, the shares of the cloud computing and e-commerce company Amazon.com (NASDAQ: AMZN) it jumped on Monday, rising 7.9% by the time the market closed. The upward movement in equities was fueled by a combination of general optimism for tech stocks, as well as a decision by various analysts to increase their 12-month price targets for equities.
Are these analysts on something? Are Amazon stocks really a buy at this level, even after they’ve grown more than 60% in the past 12 months?
Image source: Getty Images.
The way to $ 3,800
It is no wonder that Amazon shares traded sharply higher on Monday. Three analysts raised their 12-month price targets for Amazon shares by $ 700 or more. One analyst expects stocks to rise to $ 3,350 and the other two are targeting $ 3,800 in 12 months. All three analysts have buy ratings for the shares.
The common theme between the two analysts with a target price of $ 3,800 for Amazon shares is the expectation of an accelerated momentum in e-commerce in a post-COVID-19 era. Analysts seem convinced that the tailwind driving e-commerce sales amid blockades will continue, at least in some way, beyond the second quarter.
Of course, Amazon wasn’t hurting before social restrictions fueled increased demand for e-commerce. Total 2019 sales increased 20% year-over-year to $ 280.5 billion. Adjusting the winds against currencies, sales would have increased 22% year-over-year.
However, helped by locks towards the end of the first quarter that led many consumers to turn to e-commerce for essential items, growth accelerated in the first quarter. Total sales increased 26% year-over-year during the period. Analysts, on average, expect higher sales growth in the second quarter, forecasting a 28% year-over-year jump. For the full year, the consensus vision is for 24% sales growth.
Buy, sell or hold Amazon stock?
Are Amazon’s actions as compelling as these analysts suggest?
Investors should be cautious when investing in stocks after their huge increase in the past twelve months. Sure, stocks should trade at a premium valuation due to the company’s dominance of both e-commerce and cloud computing, as well as management’s impressive track record of executing when it comes to capitalizing on growth opportunities. But Amazon has a price / earnings ratio of over 150. This means the stock’s current valuation is already priced at both substantial sales growth and margin expansion for years to come.
Image source: Amazon.com.
This does not mean that current Amazon shareholders should rush to sell this growing stock. Given the underlying company’s strong performance and continued strong prospects for e-commerce and cloud computing, there is a good chance that investors can get a decent return on equities if they are sustained over the long term. But there may not be enough safety margin at this price to justify a new investment in the stock.
Perhaps investors should follow the advice of MKM Partners analyst Rohit Kulkarni. Although he has a target price of $ 3,350 for 12 months for Amazon shares, he urges investors to only buy downward shares.
