On Thursday, online retailing juggernaut Amazon.com Inc. (NASDAQ: AMZN) came out with its second-quarter 2015 earnings report. The company essentially blew it out of the water, beating analyst’s expectations by an astronomical margin. This sent traders hopping in after-hours trading on Thursday night. Their enthusiasm continued on Friday morning. Amazon’s stock was up an amazing 15% in Friday morning trading. It will take quite a bit for Amazon to keep up this growth momentum. Here’s why.
The Amazon growth story is not just about Amazon’s expansion in fundamentals or even the hope of abundant free cash flow in some distant future. It is also about Wall Street perception. Not only does Amazon need to expand its fundamentals vastly over the next two quarters, it needs to do better than Wall Street expects. Amazon’s revenue came in 3.5% above Thomson Reuters estimates. In order to achieve this monumental feat, Amazon had to expand its revenue a whopping 20%.
Similarly, Amazon will need to expand its top line and maintain profitability growth rates that exceed Wall Street estimates on a full-year basis. The mean analyst estimate is $103.34 billion for Amazon’s revenue and $0.49 for its earnings per share (EPS). A 20% expansion beyond Amazon’s revenue of $89 billion would put its revenue at $106.8 billion for the year. This would even exceed the high estimate of $105.52 billion. If this happens, along with a simple match on EPS estimates, given Amazon’s sour reputation for turning net losses, it would translate into higher share prices.
ALSO READ: What Analysts Have to Say About Amazon After Earnings
Granted, a number of factors could put a dampener on Wall Street’s euphoric attitude toward Amazon. A wrong interest rate move by the feds and Amazon falling short of Wall Street’s high expectations would definitely do the trick. Seeing this kind of euphoric attitude is reminiscent of a water balloon. The more water you put in, it the weaker the walls get. At this point, any negative catalyst could burst the proverbial balloon. Investors take heed.
As of this writing, Amazon trades at around $561 per share. This already exceeds the mean analyst target price of $498 per share by more than 12%, as cited by Thomson/First Call. Of course the high-end estimate resides at $600 per share, which still represents around an 8% potential increase.
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