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Can Amazon’s share price rise further with its upcoming Q2 results?

Despite recent uplift, Amazon’s share price is still down a whopping 27% year-to-date. Can its share price draw further upside from the upcoming Q2 results?

Amazon Source: Bloomberg

When does Amazon Inc report earnings?

Amazon Inc is set to release its quarter two (Q2) financial results on 28 July 2022, after market closes.

Amazon’s earnings – what to expect

Current market expectations are for Amazon’s upcoming Q2 revenue to come in at $119.4 billion, up 5.6% year-on-year (YoY). This is largely in line with Amazon’s previous guidance of between $116.0 billion and $121.0 billion.

Operating income (loss) is expected to be between -$1.0 billion and $3.0 billion. This trails behind the $7.7 billion from a year ago, as a result of higher labour costs, along with higher freight rates and fuel prices.

Amazon Web Services to do the heavy lifting for company’s growth

The heavy-lifting for Amazon’s growth may once again fall on its crown jewel – Amazon Web Services (AWS), which is its cloud services segment. The previous quarter has seen the AWS accounting for a larger proportion of growth, with its contribution to overall revenue currently at 16% compared to 12% a year ago. Further gains of revenue mix could play out in Q2, as the segment continues to be underpinned by more big enterprises shifting their workloads away from their own data centres.

Compared to its cloud services competitors, the growth for AWS stands at 36.5% YoY, below that of Microsoft Azure (46.0% YoY) and Google Cloud (44.0%). But considering that AWS is the number one leader in the cloud infrastructure service market, a 36.5% growth points to resilience and provides testament that there is still huge room for growth in the cloud space. But given that economic conditions are set to moderate further, cutback in investment spending has been surfacing from companies’ guidance. While growth in Q2 could still benefit from some pent-up investment spends, Amazon’s guidance on the increase in backlogs will be in focus as well. If growth in backlogs were to slow significantly, it may leave its share price susceptible to some weakness on economic growth concerns.

Revenue for selected cloud segments Source: Alphabet Inc, Amazon Inc, Microsoft Corp
Revenue for selected cloud segments Source: Alphabet Inc, Amazon Inc, Microsoft Corp

Moderating economic conditions could restrict household spending ahead

Amazon’s core business is still heavily dependent on US consumers’ spending, which is clearly put under scrutiny as economic conditions continue to moderate with the Federal Reserve (Fed)’s tightening. The University of Michigan consumer sentiment index is hanging near its lowest reading on record, while the deepening yield curve inversion between the 2-year/10-year Treasury spread seems to be screaming for recession risks. These risk factors are all being priced, with Amazon’s share price plunging as much as 40% since early-April when the debate for recession risks got heated.

With the current improved risk sentiments, market watchers will be seeking for justification that economic conditions are more resilient than feared. Its international segment revenue is expected to contract by 3.9% in the upcoming results, while its North America revenue is projected to hold up better with a 5.1% growth. Any outperformance on that front will be looked upon to downplay recession fears for now.

Guidance on consumer spending outlook will also be key. The recent Amazon Prime Day in July sold more items than any previous Prime Day, with the average Amazon order during the event up 16.8% from a year ago. While consumer spending remains robust, a large portion being attributed to household items may question the sustainability of spending momentum and outlook from Amazon can shed some light on that.

Higher labour and transport costs may put Q2 margins under threat, but can we find a bottom?

The inflationary environment is clearly not giving Amazon any slack, with its operating income for the upcoming results expected to see a sharp fall from a year ago due to higher expenses. Further pay raises, record high rates of ocean and air freight and elevated fuel prices are all posing downside risks to Amazon’s margins, with its earnings before interest, taxes, depreciation (EBITDA) margin expected to fall further to 10.3% in Q2. That said, with some slight easing in global supply chains and moderation in energy prices, estimates suggest that Q2 2022 may potentially mark the bottom for its margins and things may be set to improve from here. Guidance from the management pertaining to cost outlook will therefore be heavily looked upon, as an improvement in margin may aid to offset some of the potential slowing consumer demand and help underpin Amazon’s profitability ahead.

Amazon’s shares – technical analysis

From its weekly technicals, Amazon’s share price has held firmly above an area of support around a key 76.4% Fibonacci retracement level, extended from its Covid-19 bottom to its record peak. A bullish crossover on the moving average convergence divergence (MACD) indicator points to a reversal of sentiments from extreme pessimism in the near term, with recent up-move providing a follow-through with a bullish pin bar displayed last week. Amazon’s share price has plunged as much as 40% since April 2022.

Amazon Weekly Chart Source: IG charts
Amazon Weekly Chart Source: IG charts

From its daily chart, a higher high and higher low presented lately seems to suggest an ongoing upward bias for now. The next line of resistance to overcome will be at $126.42, where prices were weighed on two previous occasions since May this year. One may watch for any formation of a new higher low as a continuation of the near-term bullish trend ahead.

Amazon Daily Chart Source: IG charts
Amazon Daily Chart Source: IG charts

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