Marking its biggest one-day gain since December 2018, shares of e-commerce and cloud-computing company Amazon.com (NASDAQ: AMZN) jumped on Monday, rising 7.9% by the time the market closed. The stock’s move higher was fueled by a combination of overall optimism for tech stocks as well as several analysts’ decisions to boost their 12-month price targets for shares.
Are these analysts onto something? Is Amazon stock really a buy at this level, even after soaring more than 60% over the past 12 months?
Image source: Getty Images.
The path to $3,800
No wonder Amazon shares traded sharply higher on Monday. Three analysts lifted their 12-month price targets for Amazon stock by $700 or more. One analyst expects shares to climb to $3,350 and the other two are targeting $3,800 within 12 months. All three of the analysts have buy ratings for the stocks.
The common theme between the two analysts with a $3,800 price target for Amazon stock is an expectation for accelerated momentum in e-commerce in a post-COVID-19 era. The analysts seem to be convinced that the tailwind driving e-commerce sales amid lockdowns will continue — at least in some fashion — beyond Q2.
Of course, Amazon wasn’t hurting before social restrictions drove more demand for e-commerce. Total 2019 sales rose 20% year over year to $280.5 billion. Adjusting for currency headwinds, sales would have been up 22% year over year.
However, helped by lockdowns toward the end of Q1 that prompted many consumers to turn to e-commerce for essential items, growth accelerated in Q1. Total sales rose 26% year over year during the period. Analysts, on average, are expecting more elevated sales growth in Q2, forecasting a 28% year-over-year jump. For the full year, the consensus view is for 24% sales growth.
Buy, sell, or hold Amazon stock?
Are shares of Amazon as compelling as these analysts suggest?
Investors should be cautious about investing in the stock after its huge run-up over the past twelve months. Sure, shares should trade at a premium valuation due to the company’s dominance in both e-commerce and cloud computing, as well as management’s history of impressive execution when it comes to capitalizing on growth opportunities. But Amazon has a price-to-earnings ratio of more than 150. This means the stock’s current valuation already prices in both substantial sales growth and margin expansion for years to come.
Image source: Amazon.com.
This doesn’t mean current Amazon shareholders should rush to sell this growth stock. Given the underlying company’s strong performance and continued robust prospects for e-commerce and cloud computing, there’s a good chance that investors can earn a decent return on the stock if they hold for the long haul. But there may not be enough margin of safety at this price to justify a new investment into the stock.
Perhaps investors should take MKM Partners analyst Rohit Kulkarni’s advice. Though he has a 12-month price target of $3,350 for Amazon shares, he urges that investors only buy into the stock on dips.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
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