Long-Term Bull Amazon May Be Overhyped Ahead of Q1 Earnings

Well before the novel coronavirus changed the world, Amazon (NASDAQ:AMZN) was already supremely relevant, pioneering the e-commerce revolution we’re enjoying today.

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The irony here is that Amazon stock previously skyrocketed off its underlying business disrupting brick-and-mortar retailers. But now, Covid-19 threatens to do the same thing to AMZN, just ahead of its 2020 Q1 earnings report.

Currently, shares of the e-commerce and technology giant are in great shape. The investment remains one of the few bright spots in this dark period, for patently clear reasons. With most states issuing shelter-in-place orders when the coronavirus began proliferating at an astonishing rate, consumers had little choice but to hunker down.

As well, Amazon stock benefited from near-universal implementation of social distancing. I say universal because whether the government has told you to worry about the virus, people were naturally fearful; hence, it’s not surprising that companies like Uber (NYSE:UBER) or United Airlines (NASDAQ:UAL) have witnessed tremendous volatility.

But will this new normal translate to continued momentum for Amazon stock? Naturally, investors will eyeball the underlying company’s earnings for clues as to the health of the broader economy. On paper, covering analysts have a consensus estimate for earnings per share of $6.26. Forecasts range from $4.68 to $7.82. In the year-ago quarter, AMZN delivered an EPS of $7.09.

On the revenue front, analysts expect the company to ring up $73.3 billion, with individual estimates ranging between $70.3 billion to $78.6 billion. In Q1 2019, Amazon generated $59.7 billion in top-line sales.

Reasonably, it’s safe to say that Wall Street will care more about the details and the context of the earnings report, which I’ll discuss below.

Amazon Stock Faces a Surprisingly Tricky Hurdle in Q1

I’m not breaking new ground when I tell you that grocery giant Kroger (NYSE:KR) has been one of 2020’s big winners so far. As you might expect, the pandemic shifted consumer sentiment toward essentials, such as food, water and core supplies. But what happens when that urgency — assuming the coronavirus fades away — dies down?

That’s the question analysts will dig into for AMZN’s Q1 report. Of course, grocery-delivery services from Amazon Fresh, alongside subsidiary Whole Foods Market, will skyrocket. But how high sales jump will help determine investors’ attitude toward Amazon stock.

Keep in mind that AMZN’s grocery business must leap from an already lofty position. In the last earnings report for Q4 2019, Amazon produced outstanding performance metrics in this space, with delivery orders from Amazon Fresh and Whole Foods more than doubling on a year-over-year basis.

So if momentum was already super-strong prior to the coronavirus, investors will logically expect even better performance this time around. However, the risk is that too much hype often leads to disappointment. Therefore, you may want to be careful about gambling too heavily on Amazon stock prior to the earnings release.

Another point to consider is the added expense involved with deliveries. For instance, Amazon Prime members typically enjoy free two-hour grocery delivery in more than 2,000 U.S. locations. Though this kind of instant-gratification delivery has been largely paused as the company grapples with the logistic challenges of the pandemic, Prime membership sales seem to have risen during the outbreak, despite longer delivery times.

That would seem to indicate a wholesale attitude shift among consumers, eschewing the holistically free cost of shopping in person for grocery deliveries.

But without a significant increase in subscriptions, its hard to say this is wholly indicative. As consumer demand nosedives, Americans may become more price sensitive. And that wouldn’t necessarily be bullish for Amazon stock in the near term.

Exercise Caution

Overall, I remain bullish on AMZN. As I stated at the top, this is an organization that was relevant before the pandemic. While Covid-19 has been incredibly disruptive, it won’t change the wholesale consumer shift from analog platforms to digital.

At the same time, I think you can be bullish over the longer-term horizon and be tactical in the immediate term. Right now, Amazon stock appears to have trouble adding to the robust momentum it enjoyed earlier this month. To me, that signals that investors are optimistic yet cautious about the company meeting ramped up expectations.

Furthermore, as Target’s (NYSE:TGT) recent earnings report demonstrated, retailers must bank on catalysts other than coronavirus-fueled grocery shopping. If consumers are only buying groceries, that’s a huge problem because such trends are not sustainable.

Thus, in my opinion, the smart move is to wait this one out. If Amazon can’t match heightened expectations — and that’s a distinct possibility — AMZN could come down in a hurry.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/04/long-term-bull-amzn-stock-may-be-overhyped-ahead-of-q1-earnings/.

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