Amazon (NASDAQ:AMZN) is expected to report first-quarter earnings on April 30. Year-to-date, AMZN stock is up about 30%. By definition, a new bull market has begun in AMZN stock.
Therefore, many investors are wondering if they may be too late to join the party in the shares.
Fundamental catalysts will likely drive Amazon stock even higher in the quarters to come. However, between now and May 1, there will likely be choppiness in the share price, with potentially a downward bias. If you do not currently own AMZN stock, you may want to wait until you analyze the quarterly metrics. Yet investors with a two- to three-year time horizon may want to buy the dips.
Here’s why.
Amazon Stock and the Pandemic
CEO and founder Jeff Bezos has recently released his annual shareholder letter. This year his emphasis was on the Covid-19 pandemic and the company’s efforts to navigate the disaster.
Bezos was not shy about how the company’s e-commerce operations had become important in reaching households and delivering especially essential items in these extraordinary times.
As the novel coronavirus outbreak hit our shores, one of the first moves management made was to hire 100,000 employees in March. It also increased its minimum wage through the end of April. Another 75,000 are expected to join the group soon.
The company regards Covid-19 testing for its employees as well as the nation as a crucial step in ensuring that our economy can open up and start functioning at normal capacity. The emphasis on testing potentially shows that Bezos does not necessarily think life for most people will soon be back to where it was at the beginning of the year.
The letter also highlighted how Amazon Web Services, or AWS, is making inroads with customers. Most investors are always interested to learn more about the success of the AWS business. Over the past few years, revenues and operating profits of AWS have grown extremely quickly. For example, in Q4, AWS revenue came at $9.95 billion versus expectations of $9.81 billion.
Since February, a large number of hospitals, pharmaceutical companies, and research labs have been relying on AWS. And Amazon’s cloud services have the infrastructure to serve those needs.
In summary, the shareholder letter had a cautiously optimistic tone for investors in Amazon stock. And its recent price action can be seen as a reflection of that positive mood too. So far in April, AMZN stock is up around 24%. In comparison, the Nasdaq composite is up about 11%.
What to Expect in Amazon Earnings
Amazon is the largest U.S. e-commerce retailer. When the group report earnings on April 24, the Street will pay attention to the six segments that contribute to the revenue:
- Online stores (about 50% of revenue)
- Physical stores (about 6%)
- Retail third-party sellers (20%)
- AWS (12%)
- Subscriptions such as Amazon Prime (7%)
- Other, such as credit card agreements and advertising (5%)
In January, the group had reported robust Q4 results that easily beat analyst expectations. Revenue increased by 21% to $87.4 billion, compared with $72.4 billion in fourth-quarter 2018. Its earnings per share were $6.47, beating consensus estimates of $3.98.
At the time, management had also been upbeat about Q1, and said it would likely report a revenue of $69 billion to $73 billion.
As the revenue breakdown highlights, investors are likely to pay special attention to results from both e-commerce and AWS.
For example, according to eMarketer, between February and April 2020, Amazon Prime members in the U.S. have significantly increased their purchases in most product categories.
The stay-at-home economy has been affecting how we live, work, shop and study. And Amazon seems to be able to serve customers in most aspects of this ‘new lifestyle’ either through the products it delivers or the infrastructure that AWS cloud services provide.
At the end of 2019, the group’s cash on hand was more than $55 billion. For Bezos, free cash flow over accounting earnings has been crucial since Amazon’s initial days. And the company has generated free cash for almost two decades now. That staggering amount of cash it now has will likely give management a lot of flexibility in the coming quarters.
Amazon’s Q1 results will be a mirror to not only how the group’s earnings are, but also to how our consumption patterns may be changing as a result of the pandemic.
AMZN’s Recent Price Action
Amazon stock’s 52-week range includes a high of $2,462 in mid-April and a low of $1,626.03 in mid-March. In other words, in a matter of a month the shares increased by more than 50%. The price is currently hovering around $2,400.
It may not be wrong to say that in the short run Amazon stock price potentially has already discounted most of the good news the Street expects from the upcoming Q1 results. Its forward price-earnings ratio and price-sales stand at 79.1 and 4.2 respectively. Many investors may regard both values as quite rich.
As far as technical analysis, AMZN stock is currently overbought. In the coming days, the price is likely to be highly volatile, especially around its earnings date. As I write, options markets are forecasting about a 7% move in either direction following the Q1 release.
If you already own AMZN shares, you might want to stay the course and hold onto your position. That said, if you are worried about further profit taking, then within the parameters of your portfolio allocation and risk/return profile, you may consider placing a stop loss at about 3% to 5% below the current price point to protect the profits you’ve already made from Amazon stock.
If you are an experienced investor in the options market, you may also consider using a covered call strategy with approximately a two-month time horizon, i.e., Jun 19 expiry. Such a covered call position would offer you some downside protection. You would also be able to participate in a potential up move.
The Bottom Line on Amazon Stock
From a business perspective, the Covid-19 pandemic has far-reaching effects on employee health, e-commerce, technology, professional lives, study, travel, manufacturing and the wider economy. The immediate response that many countries have adopted has been a form of “shelter-in-place” measure. And during the lockdown, e-commerce and technology companies, such as Amazon, have become the ones that millions if not billions of people worldwide rely on every day.
We can only assume that the company will continue to serve customers for years to come while successfully adapting to changes in business conditions. So it is safe to say that AMZN stock belongs to a long-term portfolio. However, investors should also remember that a stock’s price increase is never a straight line up.
Investors should be ready to embrace for more volatility in the coming weeks. Short-term profit taking may soon take a bite out of Amazon stock. However, those with two- to-three- year time horizon may consider buying into any potential weakness, especially around the Q1 earnings release.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
