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What to expect from Amazon’s Q1 earnings: will the rally continue?

Amazon is expected to report solid top-line growth as it deals with increased demand during the coronavirus pandemic, but will it send Amazon shares to a new all-time high?

When will Amazon’s Q1 results be released?

Amazon will release its first-quarter (Q1) results on Thursday 30 April 2020. This will cover the three months to the end of March.

Amazon Q1 earnings: what does the City expect?

The coronavirus outbreak has highlighted the strength of Amazon’s diversified business model. As many people in key markets in the US, Europe and elsewhere remain in lockdown, Amazon’s online marketplace has become even more important to people who are now relying on the ecommerce giant for everything as most retail outlets are shut or incapable of rivalling the company’s logistical and digital capabilities.

Supermarket Whole Foods is one of the only bricks-and-mortar retailers still open, enhanced by Amazon’s online food and grocery delivery services. Its media services, like Prime Video, Amazon Music and audiobook platform Audible are providing entertainment for people stuck at home, whilst products like its smart speakers and tablets are helping keep people connected. And lastly, Amazon Web Services (AWS), the profit-maker of the business, remains a core cloud-computing service that underpins other services that people are relying on whilst they are locked up at home, such as Netflix and Facebook.

Where next for stay-at-home stocks Amazon and Netflix?

It is therefore unsurprising that Amazon is forecast to report strong to-line growth when it reports its Q1 results. Although, the impact will be limited as the US and European countries only started to introduce lockdown measures in the final month of the quarter, which means it should be better reflected from Q2 onwards. Overall anticipated revenue growth of 21.9% in Q1 is only expected to see a mild uptick compared to the 21% reported in the final three months of 2019.

Still, analysts are expecting all of Amazon’s divisions to report growth in the quarter compared to a year earlier. Online sales on its marketplace are forecast to increase 19%, while third-party sales are set to rise 27%. AWS sales are forecast to be one-third higher, while revenue from its subscription services should be up by around 29%. Revenue growth at Whole Foods is to be more modest at just 1.1%.

However, the coronavirus does not come without its challenges for Amazon. The company is seeing increased demand but it is also having to spend to adapt to the situation and its operations will not be running as efficiently as social distancing and other measures will make everyday life in a warehouse much more difficult.

For example, Amazon has already had to update over 150 processes in its facilities, source its own personal protective equipment (PPE) and hire an extra 175,000 workers just as it introduced a pay rise for most of its staff. For example, the additional workers means the cost of the pay rise alone has risen from an original budget of $350 million to $500 million.

With this in mind, analysts are expecting Amazon to post lower earnings and profits in Q1. Fortunately, Amazon investors concentrate more on top-line growth, expansion and market share rather than profits as the company is still growing at an impressive rate.

Amazon Q1 earnings consensus

Q1 2019 Result Q1 2020 Consensus YoY Growth
Revenue $59.7 billion $72.8 billion 21.90%
Pre-tax profit $4.40 billion $3.98 billion -9.40%
Net income $3.56 billion $3.27 billion -7.90%
Earnings per share (EPS) $7.09 $6.34 -10.60%

Source: Reuters

What to watch out for in Amazon’s Q1 update

The main focus for investors other than Amazon’s financial performance will be how the online marketplace is responding to the coronavirus.

There have rightly been questions about how Amazon’s warehouses and facilities can continue operating safely in the current environment, especially when demand has risen so sharply. Its six warehouses in France have been temporarily closed until at least 22 April after unions said staff were not being kept safe during the coronavirus outbreak.

Although Amazon has unrivalled logistical capabilities, the company’s service is being compromised by the surge in custom. Packages are being delayed with some products taking four weeks or more to arrive. Essential goods are rightly being prioritised, but this also reduces the wide variety of products that Amazon usually offers (which, in turn, will impact its relationships with the millions of third party sellers that use Amazon to sell their products).

While many customers will understand the strain Amazon is under right now and have fewer alternatives to choose from, this could pose reputational risk. For example, the main feature of its Prime subscription service is free next-day delivery but that has gone out of the window during the current crisis.

There is little doubt that the increased demand will hold up whilst countries remain in lockdown but there are questions about the costs. The longer the outbreak lasts the harder it will be for Amazon to operate its warehouses efficiently, which could exacerbate the delays in shipping. Relationships with staff, suppliers and customers will all be tested.

Amazon will need to demonstrate it is being proactive rather than reactive and has a plan in place to mitigate the threats the coronavirus poses to its operations. It does already have a daily Covid-19 blog that provides updates on how it is responding to the outbreak.

It should be relatively positive news for the rest of the business. AWS, which is the main driver of profit for the business, looks set to continue to rapidly grow but it is worth watching for any news on how its operations are coping as more people and business rely on the internet and cloud-computing services. Supermarkets, including Whole Foods, should prove resilient as people still need food.

How to trade Amazon’s Q1 results

Amazon has been among a handful of companies that have outperformed the wider market over recent weeks. While the Nasdaq has shed over 4.8% and the S&P 500 has plunged more than 11.7%, Amazon has rallied over 25% and hit a new all-time high on 16 April.

One contributing factor to the performance of the share price will be the fact that Amazon doesn’t pay a dividend which means there has been no threat that it would have to cut payouts like many have had to in response to the pandemic.

With IG, you can trade on the world’s best trading platform and back Amazon shares rising or falling. Go long (buy) if you think Amazon shares will increase in value, or go short (sell) if you think Amazon shares will decrease in value.

To take a position, follow these simple steps:

  1. Create an IG trading account or log in to your existing account
  2. Type ’Amazon’ or ‘AMZN’ in the search bar and select it
  3. Choose your position size
  4. Click on ‘buy’ or ‘sell’ in the deal ticket
  5. Confirm the trade

You can also buy and hold Amazon shares with IG’s share dealing service. Right now, there is zero commission when you buy US stocks, including Amazon.

Amazon shares: broker recommendations

Amazon is one of the most-widely covered stocks by brokers and the collective picture is extremely bullish. Only two of over 50 brokers believe Amazon is adequately valued, with 30 rating the stock as a Buy and 19 brokers recommending the stock as a Strong Buy.

Broker recommendation Number of brokers
Strong Buy 19
Buy 30
Hold 2
Sell 0
Strong Sell 0
Average Recommendation Buy
Target Price $2483.13
Potential upside 4.5%

Source: Reuters

Amazon share price: technical analysis

Amazon shares have been on a rip over the past month, with the stock gaining 50% since its low on 16 March. That rally took us into a fresh record high on Thursday, with bulls disregarding any potential negative impact from the coronavirus crisis. While the stock has eased back since, the question is whether this rally will continue or start to roll over from here. The four-hour chart highlights a clear ascending trendline that is being respected once again today, signalling a likely move higher from here. As such, the short-term uptrend looks likely to continue unless we see a break below the $2244 swing low.

Can the Amazon share price reach new highs?

Ultimately, Amazon will remain one of the most important businesses during this crisis, providing key services including food, entertainment and shopping at a time when consumers have fewer alternatives to choose from. The fact all of its businesses look well placed to benefit during the crisis demonstrates Amazon’s ability to shine from all angles over the coming year.

However, the crisis does not come without its challenges and Amazon has to demonstrate that it will not suffer the same fate as many of its rivals. If more warehouses have to close, then the questions will be asked about Amazon’s ability to capitalise on the situation.

While most investors will have evaluated how well their portfolio can survive the coming years, Amazon investors will be questioning how well it can thrive and the company’s job is not to disappoint.

The fact that Amazon shares have managed to climb to an all-time high at a time when most of the world economy is suffering is an extremely bullish sign that investors consider Amazon a solid bet over the long term and something of a haven during these uncertain times. The fact almost 50 brokers see further upside to the share price is another strong indication that Amazon shares could reach new highs in the near future. However, if the risks facing Amazon turn into a reality then it could have plenty of room to fall.

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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