Is It Worth Investing in Amazon (AMZN) Based on Wall Street’s Bullish Views?

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By Ronald Tech

Investors often turn to recommendations made by Wall Street analysts before making a Buy, Sell, or Hold decision about a stock. While media reports about rating changes by these brokerage-firm employed (or sell-side) analysts often affect a stock’s price, do they really matter?

Before we discuss the reliability of brokerage recommendations and how to use them to your advantage, let’s see what these Wall Street heavyweights think about Amazon (AMZN).

Amazon currently has an average brokerage recommendation (ABR) of 1.10, on a scale of 1 to 5 (Strong Buy to Strong Sell), calculated based on the actual recommendations (Buy, Hold, Sell, etc.) made by 50 brokerage firms. An ABR of 1.10 approximates between Strong Buy and Buy.

Of the 50 recommendations that derive the current ABR, 46 are Strong Buy and three are Buy. Strong Buy and Buy respectively account for 92% and 6% of all recommendations.

Brokerage Recommendation Trends for AMZN

Broker Rating Breakdown Chart for AMZN

Check price target & stock forecast for Amazon here>>>

While the ABR calls for buying Amazon, it may not be wise to make an investment decision solely based on this information. Several studies have shown limited to no success of brokerage recommendations in guiding investors to pick stocks with the best price increase potential.

Are you wondering why? The vested interest of brokerage firms in a stock they cover often results in a strong positive bias of their analysts in rating it. Our research shows that for every “Strong Sell” recommendation, brokerage firms assign five “Strong Buy” recommendations.

In other words, their interests aren’t always aligned with retail investors, rarely indicating where the price of a stock could actually be heading. Therefore, the best use of this information could be validating your own research or an indicator that has proven to be highly successful in predicting a stock’s price movement.

Zacks Rank, our proprietary stock rating tool with an impressive externally audited track record, categorizes stocks into five groups, ranging from Zacks Rank #1 (Strong Buy) to Zacks Rank #5 (Strong Sell), and is an effective indicator of a stock’s price performance in the near future. Therefore, using the ABR to validate the Zacks Rank could be an efficient way of making a profitable investment decision.

Zacks Rank Should Not Be Confused With ABR

Although both Zacks Rank and ABR are displayed in a range of 1-5, they are different measures altogether.

The ABR is calculated solely based on brokerage recommendations and is typically displayed with decimals (example: 1.28). In contrast, the Zacks Rank is a quantitative model allowing investors to harness the power of earnings estimate revisions. It is displayed in whole numbers — 1 to 5.

Analysts employed by brokerage firms have been and continue to be overly optimistic with their recommendations. Since the ratings issued by these analysts are more favorable than their research would support because of the vested interest of their employers, they mislead investors far more often than they guide.

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Commercial bookings painted a picture of triumph, surging 17% year over year (and 19% at cc), stampeding past expectations. The growth was fuelled by an uptick in mega-contracts worth $10 million and $100 million each, revolving around both Azure and Microsoft 365, all while maintaining stellar performance in core annuity sales motions.

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Microsoft's Cloud revenues manifested at $36.8 billion, a whopping 21% ascent year over year (up 22% at cc). Azure is akin to a formidable dragon on a gold hoard, lifting the company's overall performance and overshadowing previous expectations.

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On the other hand, earnings estimate revisions are at the core of the Zacks Rank. And empirical research shows a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

Furthermore, the different grades of the Zacks Rank are applied proportionately across all stocks for which brokerage analysts provide earnings estimates for the current year. In other words, at all times, this tool maintains a balance among the five ranks it assigns.

There is also a key difference between the ABR and Zacks Rank when it comes to freshness. When you look at the ABR, it may not be up-to-date. Nonetheless, since brokerage analysts constantly revise their earnings estimates to reflect changing business trends, and their actions get reflected in the Zacks Rank quickly enough, it is always timely in predicting future stock prices.

Is AMZN Worth Investing In?

In terms of earnings estimate revisions for Amazon, the Zacks Consensus Estimate for the current year has increased 0% over the past month to $5.19.

Analysts’ growing optimism over the company’s earnings prospects, as indicated by strong agreement among them in revising EPS estimates higher, could be a legitimate reason for the stock to soar in the near term.

The size of the recent change in the consensus estimate, along with three other factors related to earnings estimates, has resulted in a Zacks Rank #2 (Buy) for Amazon. You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here >>>>

Therefore, the Buy-equivalent ABR for Amazon may serve as a useful guide for investors.

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