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Market Insights

Amazon's Big Earnings Question

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A strong end to the week for the US stock market. Earnings have generally held up pretty well against some pessimistic expectations. This week we hear from the online and tech giants including Apple, Microsoft, Meta, Google & Amazon.

Amazon’s our pick for stock of the week.

It’s not been a great year for Amazon’s share price, down almost 29% in 2022, but now back above the 20 day moving average and up by almost 5% over the past five days.

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Amazon’s story is similar to many of the tech stocks. Initially buoyed by a wave of pandemic online spending, demand quickly slowed, and raised fears that all of the demand pull-forward would lead to a big drop in revenues.

For Amazon at least, revenues quickly recovered after a single quarter drop at the end of 2021.

  • September 2021 Quarter Revenues $110.81bln
  • December 2021 Quarter Revenues $137.41bln
  • March 2022 Quarter Revenues $116.44bln
  • June 2022 Quarter Revenues $121.23bln

For this quarter, revenues are estimated at a healthy $127.57bln, approximately 5% higher than the previous quarter. If these estimates are met, could it perhaps allay investor fears?

In the last quarter Amazon CEO Andy Jassy laid out the plans and things to watch for the future:

“Despite continued inflationary pressures in fuel, energy, and transportation costs, we’re making progress on the more controllable costs we referenced last quarter, particularly improving the productivity of our fulfilment network”

“We’re also seeing revenue accelerate as we continue to make Prime even better for members, both investing in faster shipping speeds, and adding unique benefits such as free delivery from Grubhub for a year, exclusive access to NFL Thursday Night Football games starting September 15, and releasing the highly anticipated series The Lord of the Rings: The Rings of Power on September 2.”

While questions surrounding progress on these fronts will likely come up in the post-report earnings call, there’s another factor that’s often overlooked.

Cloud Computing

Amazon Web Services is enormous. It’s also the biggest driver of profitability for the firm, with a ‘partner network of more than 100,000 systems integrators and independent software vendors from around the world that adapt their technology to run on or integrate with AWS’

Household names from Delta Airlines to BT, IBM and Italy’s Eni are among these, and there’s optimism among analysts that the rapid cloud computing migration will continue despite the economic slowdown.

Indeed, Microsoft’s top cloud executive Scott Guthrie says that the energy crisis is actually pushing more companies to move to Microsoft’s Azure, a key Amazon Web Services competitor:

“If you think about the current situation in Europe right now, where the energy prices are going up dramatically, if you can reduce your workloads on prem, and you can move it to our cloud quickly, you can reduce the power draw you need, and that translates into real economic savings,”

This is the big question now. Will companies look to integrate with cloud computing for cost savings and development, or pull back on these types of investments in a slowing economy?

The answer to this question could be a key driver for Amazon’s outlook.

Not investment advice. Past performance does not guarantee or predict future performance.

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