Two developments created in a tug-of-war in Amazon stock, fueling debate on our next move

It’s been an up-and-down day for Club name Amazon (AMZN), which led to an internal discussion about whether to book some profits after this year’s run higher. As Amazon came out of the gate stronger on a positive Wall Street research note, Jim Cramer said during Wednesday’s Morning Meeting that he had considered booking some profits. But, Jim quickly opted against such a move as he digested the Federal Trade Commission’s suit against Amazon over Prime and the stock declined. In a statement, FTC Chair Lina Khan said, “Amazon tricked and trapped people into recurring subscriptions without their consent, not only frustrating users but also costing them significant money.” On Wednesday afternoon’s Homestretch , Jim said he was initially worried about the FTC action until he took a closer look at the government’s complaint. He said he felt it would not hurt Amazon much, calling Prime “one of the great bargains of all time, which is Amazon’s response, by the way.” In our view, the FTC’s lawsuit is highly unlikely to result in any material negative to the Amazon investment thesis. People love Amazon Prime and the value of the service has only continued to increase over the years. We don’t see a lawsuit over making it easier to cancel the subscription service resulting in much more than a manageable fine and maybe a change to the cancelation process, which again doesn’t seem all that risky to us given the value of the service. Instead, we think investors would be better to think about some of the secular trends working in the company’s favor. Some of them were outlined by Jefferies, which raised its Amazon price target to $150 per share from $135 and reiterated its buy rating on the stock. In a note to clients, the analysts said that further upside remains, predicting fiscal year EBITDA (earnings before interest, taxes, depreciation and amortization) will prove stronger than expectations and that positive sentiment around Amazon’s use of artificial intelligence will help shares re-rate higher. AMZN YTD mountain Amazon YTD performance Notably, the Jefferies analysts arrived at their price target by using a sum-of-the-parts analysis, meaning they valued the core operating segments on their own and added them together to determine a total company valuation and PT. That’s a positive if you’re concerned about regulatory pressure because one thing regulators (and politicians) have long called for is the breakup of big tech companies that, they believe, have too much power, such as Amazon. We see the SOTP analysts as a positive not because we ourselves are calling for a breakup but because it implies that if that were to ever happen it would be viewed as bullish. At the same time, though, we have to at least consider the value of Amazon’s flywheel (all the services designed to keep users in the ecosystem) and what disrupting it could mean for longer-term growth overall. While it’s not leading the charge on generative AI, the company’s Amazon Web Services (AWS) cloud platform — the growth engine and profit center — is a clear beneficiary as adoption at large means “increased usage to train and run AI models,” according to Jefferies. “The AI opportunity remains early, and we expect AMZN’s rich history of innovation will help them close the AI gap over time” with its its mega-cap rivals, the analysts added. On the cost side, the Jefferies analysts believe that progress continues to be made and stands to result in “positive operating income estimate revisions through 2024 as AMZN grows into its overbuilt logistics capacity” in e-commerce. They expect this to be compounded by a reacceleration of AWS revenue growth in the fourth quarter as customer IT budget “constraints and cloud cost optimization headwinds” abate. We are admittedly a bit cautious on the mega-caps given their year-to-date performance, Amazon shares have gained nearly 50% in 2023. However, we are too close to a profit inflection to try and be super nimble by trimming or downgrading Amazon and then buying and upgrading it on a pullback. Rather, we are maintaining our 1 rating , believing that patience and the willingness to stomach a bit of volatility is the better bet for long-term investors. Bottom line In the end, regulatory action is a well-known and well-understood risk at this point for Big Tech. The bigger and more influential a company gets, the bigger the target on its back is for competitors, regulators and politicians alike. This latest FTC lawsuit is just another in a long list of uneventful lawsuits for the company. While it can’t be dismissed outright, the direction of the next move in the stock is going to depend much more so on sales and cost dynamics discussed in the Jefferies note. That’s where our focus lies. With a turnaround in profitability believed to be taking place right here and now, we continue to like the shares at current levels. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED. (Jim Cramer’s Charitable Trust is long AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

An Amazon Prime truck is pictured as it crosses the George Washington Bridge in New York.

Mike Segar | Reuters

It’s been an up-and-down day for Club name Amazon (AMZN), which led to an internal discussion about whether to book some profits after this year’s run higher.

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