Amazon (NASDAQ: AMZN) announced its earnings last week, and the results were simply staggering. All estimates were beaten and now analysts are raising the forecast for their share price from the current $500/share all the way up to the $700/share.
Is this a realistic forecast, and if yes, what would be the duration before such a move?
I would say it depends less on Amazon, but more on two other events: a potential Fed rate hike and the Chinese equity markets.
The reason why the forecast depends less on Amazon is that the current earnings were so good that they surprised virtually everyone. It shows visionary management and a continuation in the same direction, which is now understood as being the “norm” for this innovative company.
Recently Amazon announced that they are launching a new platform to bring entrepreneurs closer to customers and that “Amazon Launchpad” is a reality already. This shows innovation, and together with their wildly successful cloud business, Amazon hints at further success in the future for the company.
More delicate is the situation with the Fed, as they prepare to hike rates. This move is also supposed to be the start of a cyclical tightening period. A rate hike should bring US equities lower and make for a stronger dollar. This should translate into indices moving lower as well and, AMZN will be no different.
However, it is a difficult thing to deliver a rate hike in the United States as the benefits of lower oil prices actually drags on the US economy. This is because most of the jobs that drove this recovery in the US were in the oil states like Oklahoma and Texas, and lower oil prices will eventually mean fewer jobs in this area.
China is not helping the situation as global demand for Chinese products is slowing. Their recent stock market problems are also making the situation there extremely fragile, even if the recent Chinese GDP showed 7% economic growth.
My take is that the Fed is not going to hike rates anytime soon, and this means equities will have a one-way street. What I would do is to wait for the month of July to end, and starting with August I am favoring a call option for Amazon with an end of month expiration date as pressure on the Fed will mount on August. In such a case, AMZN should benefit the most as each US data miss in August will make a rate hike being delayed more and more into the future.
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