Ahead of its Q3 earnings report October 29th, let’s take a look at the ultimate beast – Amazon. After underperforming lately, Amazon stock $AMZN had a 1% end of day rally Friday afternoon in anticipation. Overall, $AMZN is handily beating the market, up 77% year to date against the S&P’s 9.5%. More recently Amazon’s stock price has drifted lower however – still down 10% from an early September high of over $3,500. It’s about $3,200 as of this writing. With this short-term discount baked in, if you are bullish on the earnings report and on Amazon in general, now may be a good time to take a position.
Amazon Earnings Report: Oct 29th
After the market closes on Thursday the 29th, Amazon is expected to announce 3rd quarter revenue of $92.5 billion, up 32% YoY. The Street is also expecting a huge earnings per share increase of 71%, to $7.25 per share from 2019 Q3’s $4.23. These numbers are important because short term, the stock will go up if there is a beat of these expectations and down if there is a miss.
Growth Catalyst: Amazon Web Services (AWS)
Amazon is the king of e-commerce but their primary growth catalyst is their cloud hosting business, AWS. In Q2, growth in AWS rose 29% and accounted for 12% of their total revenue and 59% of their operating profit — yep, they make much better margins on AWS than delivering things to your doorstep.
The question is, long term, is AWS able to continue its growth? They certainly have competition breathing down their neck, namely by Microsoft Azur and Google Cloud stateside and Alibaba internationally. Microsoft’s Azur picked up the highly lucrative $10 billion Defense Department JEDI contract and had been growing faster than AWS, albeit from a smaller base. AWS is roughly twice the size of Azur and Google Cloud is a third the size of Azur.
“We believe AWS will remain number one, although the gap will continue to close”Glenn O’Donnell, vice-president and research director at Forrester
Q4 Guidance: Crushing Holiday Sales During a Pandemic
Q3’s earnings report needs to not only beat expectations on e-commerce and AWS but also surprise on the upside for forward guidance. In a pandemic-themed Q4, the expectation on the Street is a 27% YoY increase in revenue to $111 billion and adjusted EPS to rise to $8.87 (37%). How will consumer shopping behavior impact this prediction in light of a “dark winter” of covid-19?
Our Take: Amazon continues to be a buy and hold
In difficult times, the smart money flees to safe havens, such as gold and Treasuries. Among stocks, and in a near zero interest rate environment, Amazon can also serve as a haven of sorts. Mega tailwinds such as enterprise digitization into the cloud and covid-19’s push of consumers towards e-commerce will fuel Amazon’s ascension for the foreseeable future.
At the end of day, we look at leadership for long-term investments. Jeff Bezos thinks so far ahead (drones, electric delivery vehicles) that it is our good fortune to be able to ride his coattails by investing in $AMZN. Short term, the stock has been in consolidation station and is due for another bullish round. If $AMZN disappoints or the stock doesn’t immediately pop from the news, we recommend accumulating shares. The moat for Amazon is only getting wider in e-commerce and this beast isn’t going anywhere.
Disclosure: We have a position in and are long Amazon.