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Amazon earnings preview

Amazon will announce their second-quarter results tonight after the close in New York, at 9pm (UK time). 

This quarter could become a significant turning point for Amazon’s shares. Following a month of consolidation, the shares recently resumed their uptrend, breaking out over the $1,000 level and challenging $500B in market capitalisation. The big question now is whether reaching these big round numbers is the last hurrah or a speed bump on the way to higher levels.

Amazon is trading with a price-earnings (P/E) of 195x, way above its 33% long-term growth rate. This quarter, traders are expecting the company to report adjusted earnings per share (EPS) of $3.04 on sales of $37.2 billion representing a year-on-year increase of 8.4% and 22.3% respectively. Last quarter, adjusted EPS of $2.52, and that was 6.7% above market estimates, while sales of $35.7B were essentially in line with expectations. While dealers could accept an in-line quarter, it remains to be seen if the company can beat expectations enough to keep the rally going and the price above $1,000. A miss on results or guidance could be punished particularly severely given the shares’ lofty valuation.

The company registered eight consecutive quarters of positive net income. The web services business saw a 42% jump in revenue in the first-quarter, even though they were cutting prices in order to draw in business. Amazon have been gaining a share of the cloud computing market, form the more established technology companies like Microsoft. The growth rate of revenue from the web services has dipped in the past two quarters. Investors don’t want to see a continuation of this trend, seeing as the division is propping up the core retail business.

Investors in tech stocks want to see revenue growth and that is what Amazon have in abundance, over the long-term. The high cash flow at the company allows it to pour funds into other businesses like Amazon Prime and Amazon Echo. Netflix has sent the trend for online streaming and producing popular content, and it is up to Amazon Prime to start catching up with them. 

Amazon is in the process of acquiring Whole Foods for $13.7 billion, and even though investors foresee the deal going through, there has been some talk around anti-trust issues. Both companies involved will be filing information with government bodies like the Federal Trade Commission and the Securities and Exchange Commission this week. Amazon will gain access to the UK grocery market when the takeover is completed, and this has put pressure on British supermarkets who are fearful it will reduce their market share.

The stock reached another all-time high this week. The momentum is with the bulls, but should we see any pullbacks, $1000 and $931.39 could provide support.  

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