How to get a slice of the Amazon pie

Amazon will report Q2 earnings after the US market closes on Thursday 30th July. This is a hotly anticipated report, with expectations of both mega revenues on top of a large increase in costs. In fact, CEO Jeff Bezos said that in normal circumstances Amazon would expect to make $4 billion in Q2, however, these are not normal circumstances, and Bezos prepped the market earlier this year for Amazon to spend $4bn or more in the last quarter. Costs are being driven higher as demand surges – as more people order online due to the pandemic the cost of delivery, especially the company’s Prime service, is surging. Costs are also adding up as the company ensures that it remains operational across the world at the same time as maintaining employee safety. So, will the cost of Covid cause Amazon’s share price to tank? 

Q2 results crucial for Amazon’s future direction 

Amazon’s share price has undoubtedly had a fantastic pandemic. In early March, as the western world entered lockdown, Amazon’s share price was approx. $1,650, today it has nearly doubled in price at $3,064. Amazon is the world’s largest retailer, and is valued at approx. $1.4trillion, to put that into some context, Walmart is worth $339bn, Costco $134bn and CVS $84bn. Traditional investing advice would tell you to avoid a stock that has doubled in price over a number of months, however, the world has changed at a rapid pace as Coronavirus has taken hold, that is why Q2 results could be the best indicator of whether Amazon is worth buying. 

Q2: the results in detail  

Here is what to look out for in tonight’s results: 

·      Revenue between $75-$81bn, the average of analyst expectations is $80.84bn. 

·      Earnings per share is expected to come in at $1.34, compared with $5.22 in Q2 2019. 

The fall in the EPS figure is mostly down to the increase in spending during the pandemic. Since the pandemic is not expected to last forever, analysts may look through the increase in costs and figure out how well Amazon would have done without the cost increase. This could be a better way to view Amazon’s share price. If, after stripping out the effects of Covid, then Amazon's profit looks strong, and if guidance for Q3 is good, then we may see Amazon’s share price reach fresh record highs. 

Is now the time to buy Amazon?

Traders and investors love a bargain, and after dropping more than 1.3% today, this could be a good buying opportunity. While it would always be better to have bought Amazon a year ago, for those who failed to pick up Amazon earlier then this decline could be a buying opportunity as it is hard to see any competitor taking a share of the Amazon pie any time soon. However, there could be trouble ahead for Amazon if Q2 revenues disappoint. We doubt that this will happen, but if Amazon management suggest that online buying will fall once the worst of the pandemic is behind us then we could see prolonged weakness in the Amazon share price and a decent decline back to key support around the $2,750 level. We think that a weakness in future revenues is a low risk event, however, it is worth watching out for, especially as we believe that the increase in costs will be temporary. 

Amazon: the great American utility 

Overall, even if Amazon reports a surge in costs and a drop in earnings per share compared with last year, as long as it generates strong revenues then we expect to see the recent weakness in Amazon’s share price act as a buying opportunity. If Amazon’s share price rises on the back of these results, where could they go next? The sky really is the limit as Amazon transforms into a utility that people need on a daily basis, rather than a mere ecommerce stock. A break above $3,200 could open the way to $3,400 and beyond. However, we would suggest that traders concentrate on entering a long Amazon position on a pullback. $2,850 would be ideal but failing that $2,950- $2,980 would be a decent entry level.