Remember the dot-com bubble in the late ’90s? Even if it was before your time, you’ve probably at least heard of it. Internet stocks skyrocketed for years until their valuations got so out of hand that the bubble burst in spectacular fashion. Amazon (NASDAQ: AMZN) was among the stocks that were hit hard by the inevitable sell-off.
I don’t think we’ve been in a bubble like the one experienced two decades ago, but for Amazon shareholders, it might feel like that’s the case. Shares of the e-commerce and cloud-hosting giant have plunged more than they have at any time since the dot-com bubble burst.
But despite Amazon’s dismal performance over the past year — down 30% over that time frame — there’s still quite a bit of optimism about its prospects. Here are three reasons why some stock analysts think Amazon stock could soar over the next 12 months. The average analyst estimate is for a 40% jump.
1. Lower costs
What’s the most important driver of increasing stock prices? Over the long run, it’s earnings growth. Even over the short term, increased earnings typically push share prices higher. Analysts expect a huge jump in earnings for Amazon in 2023 — and for good reason.
For one thing, Amazon is cutting costs in a significant way. In November, the company announced it was reducing staff by 10,000. Earlier this month, Amazon revealed a second round of layoffs of 8,000 employees. It has also taken other steps to control costs, including tightening its capital expenditure spending.
Lower costs lead to higher earnings when revenue holds up well. I’ll touch on some factors that should help Amazon’s top line in the next two points.
2. Lower inflation
Amazon’s impressive revenue growth of the past slowed considerably in 2022. Was it because customers don’t want to shop online or organizations don’t want to shift their IT operations to the cloud? Are competitors at long last slaying the Amazon dragon? No and no.
In Amazon’s third-quarter conference call, CFO Brian Olsavsky blamed much of the company’s sluggish sales growth on inflation. He particularly highlighted higher fuel prices and energy costs as reasons why customers were having to watch their spending.
The good news is that the inflation outlook appears to be improving. In December, the Bureau of Labor Statistics reported the smallest 12-month increase in inflation in more than a year and the Federal Reserve has indicated that it will increase interest rates further (albeit by a smaller amount than in recent months).
This all means that the primary factor behind the company’s slowing revenue growth shouldn’t be as problematic in 2023 as it was in 2022. Analysts believe that Amazon’s revenue will indeed grow at a faster rate this year than it did last year.
3. Mild or no recession
The biggest wild card for Amazon is what happens with the economy. A severe recession would no doubt hurt the company’s top and bottom lines. However, most Wall Street analysts appear to think that the U.S. will only have a mild recession or perhaps no recession at all.
Major banks are bracing for a potential U.S. recession, but they don’t think it will be a really bad one. Analysts at Moody’s Analytics don’t foresee a recession. Instead, they project a “slowcession” this year where the economy slows a little but not enough to enter a full-blown recession.
Amazon should be able to weather either of those scenarios relatively well. Also, stocks often begin to rebound well before the end of a recession so it’s quite possible that Amazon stock could take off, especially in the second half of 2023, even if there is a recession.
Are the analysts right?
I don’t know if Amazon stock will soar 40% over the next 12 months. Wall Street analysts don’t know for sure, either. However, I think the reasons behind their optimistic outlook for Amazon stock make sense.
More importantly, I think that Amazon will continue to be a big winner for investors over the next decade and beyond. The current situation isn’t exactly like the period after the dot-com bubble burst, but it nonetheless presents a great opportunity for long-term investors.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Keith Speights has positions in Amazon.com. The Motley Fool has positions in and recommends Amazon.com. The Motley Fool has a disclosure policy.