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Amazon share price ends dismal January with bullish Q4 sales forecasts

Amazon share price: Amazon logo

With the Amazon (AMZN) share price trading near its lowest level since the summer of 2020, investors will be hoping that holiday sales helped to lift revenue when the company reports its Q4 results on 3 February.

Amazon has said that it’s expecting sales to be higher sequentially for the quarter, up to between $130bn and $140bn, which would represent year-on-year growth of between 4% and 12%. For analysts polled by Zacks Investment Research, sales are forecast to come in at a consensus of $137.8bn. The positive sales predictions come after the wave of restrictions that were imposed by governments to curb the spread of the omicron variant, which helped spur demand for online shopping. 

However, the outlook isn’t entirely rosy. The research firm also expects Amazon to report earnings per share of $3.89, which would represent a year-on-year fall of 72.4%, as the company’s high operating costs continue to eclipse profits.

Amazon share price leads tech pullback 

It’s no surprise that big tech stocks were a major casualty during the broad market selloff in January, with the Nasdaq ending the month down 8.9% (the S&P 500 lost 5.3% during the same period). 

The Amazon share price was one of the worst-performing tech stocks, hitting a 52-week low of $2,707.04 during intraday trading on 24 January before closing the month down 10.3% at $2,991.47. Over the past year, the stock has fallen 6.7%  

However, as the company approaches its Q4 announcement, investor sentiment appears to be getting more optimistic. The Amazon share price jumped close to 4% on 31 January – although the stock still trades 10.7% off its 2022 opening. 

Amazon targets strong Q4 revenue but warns of high costs

Although Amazon expects to see higher revenue in Q4, the company warned that costs are likely to rise to $20bn, which means it might end up reporting a loss for the final quarter of the fiscal year.

Two things to compare in Amazon’s Q4 results are total revenue services, which includes Amazon Web Services (AWS) and Prime, and retail sales. For the first time in its history, the former brought in more than the latter in Q3.  

The earnings call should also be an opportunity for Amazon to share insights into any upcoming strategic plans for AWS and its advertising business, which grew by 49% in Q3. These are the areas that have shown rapid and profitable growth on the back of heavy investment during the pandemic and are more likely to withstand reopening pressures moving forward. 

Q3 profits show signs of slowing down 

In the third quarter of fiscal 2021, Amazon reported revenue of $110.8bn, slightly below the $111.8bn that analysts expected. While it was the company’s third-best quarter on record, the year-on-year growth rate of 15% was the company’s lowest since 2014. AWS performed strongly, increasing 39% year-on-year to $16.1bn and surpassing expectations. Meanwhile, online store sales disappointed, falling sequentially from $52.9bn in Q2 2021 to $49.94bn. 

There were also signs that profit growth is starting to slow down as a result of sharply increasing costs. Operating profits were $3.2bn or $6.12 per share, well below expectations of $8.96 per share, and down from the $6.3bn or $12.37 per share reported in Q3 2020. 

In their analysis of the Q3 results, Hargreaves Lansdown analysts commented: “With high streets shut, Amazon has been a natural home for consumers’ spare cash, AWS services remote working, which has suddenly become the norm, and tech wizardry is all the more useful when we can’t see friends and family in person. It’s possible we're starting to see those tailwinds unwind – making growth more of a challenge in the years ahead.”

Analysts say AWS will drive future growth

Analysts at Hargreaves Lansdown also described Amazon as a “veritable Pandora’s box of excellent businesses”. They added that “conventional retailers are going to have to deliver some dramatic changes to compete with the uncontested king of ecommerce going forwards, while cloud computing provides long-term opportunities to service the remote working and data revolutions”. 

However, the analysts flagged that the big question over the next year would be whether Amazon can capitalise on those opportunities in online shopping and cloud computing at a reasonable cost. 

Brian White at Monness, Crespi, Hardt & Co. agrees that AWS is the key to the company’s future growth, but he believes investors need to look beyond the Q4 2021 results. He has given the stock a $4,500 price target, which implies an upside of 50.4% from its 31 January closing price.

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