Amazon’s share price: What to expect in Q3 earnings

Amazon’s [AMZN] share price has soared as the coronavirus sees an increased shift to ecommerce. Whether in online shopping, cloud computing or video streaming, Amazon’s business model is well-positioned to excel. However, while profits rose sharply last quarter, costs did too. There are also emergent threats to its lucrative cloud computing business. How this plays out in Q3 results is likely to influence Amazon’s share price post-earnings.

How is Amazon’s share price performing?  

Amazon’s share price closed at $3,204.40 last week, 9.79% below its 52-week high of $3,552.25, achieved on 2 September 2020. Despite dropping back, Amazon’s share price has skyrocketed during the Covid-19 pandemic, jumping 73.15% for the year to date to 27 October’s close. 

When is Amazon reporting Q3 results?

29 October

What could impact Amazon’s share price?

Amazon’s Q2 results showed that profit had risen sharply, as people flocked to online shopping through lockdown. However, as with other businesses popular during lockdown, costs also soared as a result of employee safeguarding measures and hiring. These costs came in at a staggering $4bn, as the company hired 175,000 new employees, expanding its grocery delivery capability by 160%. 

Amazon’s increased sales still managed to outstrip the rise in costs. The online retail giant expects to spend another $2bn in Q3, with sales anticipated to be between $87bn and $93bn. Amazon’s web services division also showed impressive gains in Q2, with operating income of $3.4bn, up 60% on the year. 

Investors will be watching for proof the recent boom in online shopping and cloud computing is here to stay — anything less than a blockbuster performance could hit Amazon’s share price.

Wall Street's consensus EPS forecast for the quarter ending in September is $7.27, versus $4.23 in Q3 2019 — a jump of 71.9% — according to Zacks Investment Research. Revenue is expected to rise by 32.7% year-on-year to $92.83bn. 

Threats to Amazon’s share price

Cloud computing rivals

There's little doubt that Amazon is the dominant brand name in online retail and home delivery. Amazon has thrived in a sector which has only been inflated by the rise of online shopping during the pandemic. Dominance is no guarantee of ongoing success, however, as other companies, like IBM [IBM], have discovered. 

One threat is increased competition, particularly in the web services area. More rivals are entering the cloud-computing sector, such as recent IPO Snowflake [SNOW]. It is revealing too, that while the web services division made up just 12% of sales, it equated to 63% of Amazon’s profit in 2019, as noted by Hargreaves Lansdown equity analyst Emilie Stevens. Still, the cloud-computing space in which Amazon is currently the dominant player was estimated to be worth circa $200bn last year, and could be worth over $761bn by 2027, according to Stevens.

Potential change at the White House

Another threat to Amazon’s share price and bottom line is prospective US president, Joe Biden. One of the key Democratic Party themes throughout the election campaign has been unease about how the big tech companies have ever-increasing control of our everyday lives, along with the amount of taxes they pay on their huge profits.

Kamala Harris has already been a vocal critic of tech companies so, in the event of a Biden win, there is likely to be much stronger action on competition policy, antitrust enforcement, privacy and cybersecurity in the tech sector. There could also be increased employment protections, higher corporate taxes, and the closure of loopholes allowing firms to minimise their tax liability, all of which could add to costs and see Amazon’s share price falter.

Where next?

Despite these potential concerns, it's safe to say that analysts see more upside in Amazon's share price, with 42 Buy ratings and only one Sell on the Wall Street Journal, in addition to three Overweight and three Hold ratings. This translates to a pretty emphatic Buy recommendation. The average target for Amazon’s share price is $3,742.83, which would represent a 16.8% hike based on last Friday's closing price of $3,204.40.

"Its operational efficiency, network effect, and laser focus on customer service provide its marketplaces with sustainable competitive advantages that traditional retailers cannot match," argues Morningstar’s R. J. Hottovy. Morningstar believes the shares are undervalued; awarding a fair value estimate of $3,500. 

Amazon's share price vitals, Yahoo Finance, 28 October 2020