JPMorgan still sees Amazon as best investing idea ahead of third-quarter earnings

Published Wed, Oct 26 202211:02 AM EDTUpdated Wed, Oct 26 202212:42 PM EDT

Even amid worry that the U.S. is facing a recession that will hit retailers, Amazon remains JPMorgan's best idea ahead of its third quarter earnings results, due Thursday. Since its last earnings report, Amazon stock has shed roughly 28%, and JPMorgan has trimmed its estimates to account for currency headwinds given the strong U.S. dollar and slower discretionary spending. Still, the firm is bullish on Amazon — it has an overweight rating and a $175 price target on the company. "We remain confident AMZN can re-accelerate revenue growth and expand OI margins into 2023, largely driven by Retail improvement and still solid AWS growth," wrote Doug Anmuth in a Wednesday note. He acknowledged that Amazon may be impacted by some of the same forces that hit Alphabet and Microsoft in their respective quarters. Microsoft reported an earnings beat but shares fell on a weak guidance, while Alphabet missed Wall Street expectations on the top and bottom lines. "MSFT Azure growth slowdown in the December quarter could also be reflected at AWS, but we still expect Cloud spend to be resilient given secular shift & prioritization for corporates," he said. "GOOGL's results last night may also raise concerns about heavy spending & headcount, but we believe AMZN is a couple quarters ahead in rightsizing its cost structure post pandemic & therefore closer to benefiting from margin improvement." The big picture Amazon is better positioned than its peers to withstand an economic downturn due to its low prices, shipping speed and inventory, according to Anmuth. "Retail top line concern is mostly driven by macro & how AMZN will hold up in a recessionary environment," he said. "Near-term, we think higher in-stock levels and faster delivery speeds will be key drivers as Prime returns to normal, & we expect AMZN to have an inventory advantage this holiday season as omni-channel retailers may be more constrained by physical space, while AMZN also has the benefit of 3P sellers." The company should also benefit from lower freight and fuel costs relative to the first half of the year, as well as further rationalization of heavy pandemic spending. In addition, the company focus on improving its retail margins will help overall. The company has a goal of returning retail margin levels to what they saw before the coronavirus pandemic. "At Code last month, CEO Andy Jassy indicated that AMZN built out the logistics network in a couple years when it was expected to take 6-10 years," Anmuth said. "He also called Retail a mid-single digit margin business, which we think reflects more of a target margin." Elsewhere, Anmuth is encouraged by the cloud service AWS's $100 billion backlog and sees solid growth for the sector going forward. The company is also boosting its free cash flow to return to pre-pandemic levels. — CNBC's Michael Bloom contributed to this report.