We recently compiled a list of the 9 Best Dow Stocks to Buy According to Analysts. In this article, we are going to take a look at where Amazon.com Inc. (NASDAQ:AMZN) stands against the other Dow stocks.
Since its introduction in 1896, the Dow Jones has undergone significant changes but remains a popular benchmark for measuring the economy and the overall stock market outlook. While the Index has gained 13% year to date, it has lagged the S&P 500, up by 21% over the same period.
The significant underperformance is because the Dow is mostly made up of blue-chip American companies, most of which have come under pressure amid deteriorating macroeconomics. While the Index is mostly made up of financial services companies at 23%, followed by technology at 20%, it has felt the full brunt of deteriorating economic conditions.
READ ALSO: 8 Worst Performing Tech Stocks in 2024 and 10 Worst Performing Blue Chip Stocks in 2024.
The U.S. economy is reeling from the effects of high interest rates, resulting in a slowdown in the labour market, and the manufacturing sector has significantly affected the Dow holdings. Additionally, the soaring geopolitical tensions in the Middle East have rattled investors’ sentiments, resulting in most of them shunning equities in favor of safe havens like bonds and treasuries.
The uncertainty around the upcoming U.S. presidential election has only exacerbated the situation, with investors shunning stocks that would be affected mainly by a change of policies once there is a leadership change at the White House. According to analysts at Bank of America, who ends up in the White House and Congress could have a significant impact on critical corners of the stock market.
“Profits accelerating are far more important than who is sitting in the Oval Office. But politics can make or break sub-sectors,” the firm wrote in a research note to investors.
Amid the headwinds, the overall equity market has been trading higher, with major indices led by the Dow and the S&P 500 rallying to record highs. The strong gains have come on most companies delivering solid financial results and shrugging off the effects of high interest rates. Nevertheless the rallies have resulted in overstretched valuations, raising serious concerns for the investment community.
“The market had moved into overbought territory, making it vulnerable to anything it perceives as negative … It’s now worried that the Fed has not declared victory on inflation, and not to mention, the concerns post-election,” said LPL Financial chief global strategist Quincy Krosby.
A resilient U.S. economy that has steered clear of recession has helped support most stocks in the Dow, helping fuel the upward momentum. The International Monetary Fund thinks growth in the U.S. will remain robust. In its latest World Economic Outlook, the IMF increased its estimate for U.S. GDP in 2024 to 2.8% from its 2.6% forecast in July while raising its 2025 growth forecast for the country. It’s the only advanced economy with its economic trajectory revised upwards for both years by the IMF. Nevertheless, it has warned of slowdowns in emerging markets.
“Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries. Having growth stuck in low gear could also further exacerbate income inequality within economies,” the IMF warned.
With the U.S. economy expected to remain resilient as the Federal Reserve pushes forth with interest rate cuts, Dow stocks that have underperformed are well poised to bounce back. A lower interest rate environment on the back of improved economic conditions heading into year-end would make the case for the best Dow stocks to buy, according to analysts.
Our Methodology
To compile our list of the best Dow stocks to buy according to analysts, we started by analyzing the Dow Jones Industrial Average. We screened these stocks based on average price targets, focusing on stocks with significant upside potential. Finally, we ranked these companies in ascending order based on their price target upside as of October 23. We have also mentioned the hedge fund sentiment around each stock.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A customer entering an internet retail store, illustrating the convenience of online shopping.
Amazon.com Inc. (NASDAQ:AMZN)
Average Upside Potential as of October 23: 18.17%
Number of Hedge Fund Holders: 308
According to analysts, Amazon.com, Inc. (NASDAQ:AMZN) is arguably one of the best Dow stocks to buy, owing to the diversified nature of its business empire and tremendous opportunities for growth. While the company is best known for its e-commerce operations, it’s become a key player in the artificial intelligence race, strengthening its growth prospects in cloud computing.
An increasingly important aspect of Amazon’s operations is its third-party seller services division. With little risk, it is its second-largest revenue segment and offers a pleasant profit boost. It makes sense that Amazon.com, Inc. (NASDAQ:AMZN) provides this service to independent sellers who wish to join the Amazon network, given that it has established a sizable warehouse footprint and logistics network to transport goods from seller to buyer. Because third-party sellers are in charge of maintaining the product inventory, the business benefits from this.
With an annualized run rate of $50 billion and a 20% growth rate, Amazon’s advertising division is now a significant player in digital advertising, trailing only Facebook, Instagram, and Search. However, advertising should continue proliferating as Amazon can better target ads to customers more likely to purchase by connecting its vast customer data. Additionally, there are still unexplored opportunities in this segment.
For Amazon.com, Inc. (NASDAQ:AMZN), advertising is a rising star. With a 20% increase in revenue in the second quarter, it is currently the segment with the fastest growth rate, and it is not finished yet. Although it has experienced rapid expansion, management says it thinks video advertising is still in its infancy. Its commerce business also benefits significantly from advertisements, contributing to the recent profit margin increase.
Going by the tremendous opportunities for growth to generate long-term value, Amazon is rated as a strong buy with an average price target of $224.16, implying an 18.17% upside potential.
According to Insider Monkey, Amazon.com, Inc. (NASDAQ:AMZN) is currently the most widely held stock among hedge funds. As of Q2 2024, 308 hedge funds had stakes in the company, reflecting its strong appeal to institutional investors.
Alphyn Capital Management stated the following regarding Amazon.com, Inc. (NASDAQ:AMZN) in its Q3 2024 investor letter:
“Amazon.com, Inc.’s (NASDAQ:AMZN) continued growth is driven by its strong performance in AWS and advertising, which grew 19% and 20%, respectively. E-commerce growth moderated to 9.3%, likely due to softer consumer demand.
In previous letters, I mentioned how Amazon’s heavy investments in logistics and fulfillment suppressed margins for some time, but the company is now reaping the rewards of those earlier expenditures. European operations have been profitable for the second consecutive quarter, while North American operating margins have risen from pandemic lows to 5.3%. A key ongoing area of focus for Amazon has been reducing the “cost to serve”; this is beginning to show tangible benefits. In 2023, Amazon undertook a “regionalization” strategy, which divided the U.S. into eight distinct regions for fulfilment and transportation, with corresponding distribution centres in each. As I learned from an expert interview done by InPractise, “regionalization” has resulted in estimated shipping expenses dropping from $4.76 per unit to $4.50, and they are now approximately $4.26, with potential reductions of 2-3% annually. Interestingly, Amazon leaned on its third-party vendors (3P) to finance much of this strategy. It did so by requiring 3P vendors to ship inventory to the multiple regional distribution centers, instead of to a single location as they used to do.
Moreover, Amazon imposed penalties for failing to meet strict minimum and maximum quantities. In this way, Amazon used 3P inventory to expand its distribution capacity by around 24 million square feet, much of which it could use for its own 1P inventory. Clever strategy, but one wonders if this raises the risk of an eventual vendor backlash due to the added financial and logistical pressures on 3P sellers.
Like Alphabet, Amazon invests heavily in its AWS infrastructure to support its growing AI business. In the first half of the year, the company spent $30.5 billion on capital expenditures, with plans to exceed that in the year’s second half. When questioned about this during the earnings call, CEO Andy Jassy emphasized that they are seeing significant demand for AI-related services, which he believes will become a “very large” business for Amazon.”
Overall AMZN ranks 4th on our list of the best Dow stocks to buy according to analysts. While we acknowledge the potential of AMZN as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than AMZN but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.