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Can Amazon sustain cloud growth as e-commerce tailwinds fade?

Amazon share price: Amazon prime video logo

The Amazon [AMZN] share price surged more than 10% following the company’s fourth-quarter 2021 earnings report on 3 February. While investors initially reacted positively to record holiday sales, shares in the e-commerce giant have been trading choppily since, closing at $2,787.82 on 26 April. 

The stock is up around 0.4% since markets closed on 3 February, but down more than 18% year-to-date. Amazon shares came under downward pressure amid the broader technology sell-off triggered by the war in Ukraine and concerns about an overvalued stock market. 

As the company joins its tech peers in announcing earnings this week, investors will be looking to its cloud computing division to see if the success in Q4 was sustained through Q1, especially as cost pressures continue to mount amid rising inflation. 

Rising inflation, higher costs 

During Q4, the company had its biggest Black Friday to Cyber Monday shopping event – a crucial period for retailers – with US-based third-party sellers selling an average of 11,500 products per minute. The holiday period helped push total revenue up 9% year-on-year to $137bn and 22% for the full-year to $469.8bn.

However, despite the strong seasonal performance, Amazon’s last quarter wasn’t without disappointment. E-commerce growth continued to slow in the three months to the end of December. Sales from the segment are still North America-heavy, with the region bringing in $82bn, up from $75bn in Q4 2020. International e-commerce sales fell slightly from $37.4bn to $37 2bn.

Operating income during the quarter was $3.5bn, but the company incurred $4bn in costs related to inflationary pressures, lost productivity and disruption to operations. Amazon’s CFO Brian Olsavsky said on the earnings call that the costs were “driven by the very tight labour market in the second half of 2021, and more recently by the emergence of the Omicron variant. We do expect these cost challenges to persist into Q1, albeit adjusted for lower seasonal volumes relative to the fourth quarter.”

To offset the impact of the costs, the company announced an increase to its annual Prime subscription from $119 to $139, which came into effect on 18 February. In defending the move, the company cited the “rise in wages and transportation costs”.

The challenge of sustaining cloud growth

With Amazon reporting its Q1 earnings on 28 April, investors are likely to pay close attention to whether there has been any Prime customer churn. The company is betting big on productions such as the Lord of the Rings series, while it has also secured the rights to show NFL games on Thursday nights. However, neither starts streaming until September, which may lead to customers pausing their subscriptions in the interim..

Net sales for the three months to the end of March are expected to be between $112bn and $117bn, with the consensus among analysts coming in at the top of the range. This would mark a 7.8% increase on the $108.5bn sales reported in Q1 2021. 

With e-commerce growth expected to continue to slow, investors will be pinning their hopes on the Amazon Web Services segment to deliver once again. The cloud business saw revenue rise 40% in Q4 2021 to $17.78bn, and analysts believe it could surpass expectations again. 

Analysts at Hargreaves Lansdown noted that cloud computing provides long-term opportunities to service remote working, which has become the norm, as well as meeting data centre demand. Yet, if these tailwinds begin to unwind, sustaining growth could become challenging. 

“Amazon is a Pandora's box of excellent businesses. The big question over the next 12 months is whether it can capitalise on those opportunities at a reasonable cost,” they wrote. 

It’ll be interesting to see whether strong results move the share price. Investors may wait until nearer the 20:1 stock split, set for 6 June, to buy in. As of Tuesday’s close, the stock was down 15.4% in the last month.

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