Amazon Preview: Probably The Best Big Tech Report This Quarter

Summary
  • Amazon reports earnings on Super Thursday, and I think the company will deliver the best set of numbers within the FAAMG group.
  • I have high confidence in the large e-commerce segment in the third quarter, although cloud could suffer from tight client budgets.
  • In the short term, I see risk in the stock’s rich valuations. In the long term, Amazon should continue to benefit from trends in retail and cloud.
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“Super Thursday” is finally here. On Oct. 29, four of the FAAMG stocks will report earnings, with Microsoft (MSFT) having already delivered its impressive set of numbers.

My Big Tech pick of 2020, Amazon (AMZN) is expected to report revenue growth of 32%, which would be in line with the average top-line increase of an outstanding first half of 2020. Off a relatively low base, projected EPS of $7.36 would represent a jaw-dropping year-over-year spike of 74%.

To be fair, Amazon is famous for delivering financial results that deviate widely from expectations, especially on the bottom line. Still, I believe the company has the best chance of outperforming within its FAAMG peer group in the third quarter, considering that the early 2020 tailwinds (i.e. rapid shift to e-commerce, cloud adoption) have remained in place.

What I expect to see

Christmas came earlier in 2020. Last quarter, Amazon dropped the mic when it delivered the widest revenue and earnings beat in the company’s history. Summer sales topped 2019 holiday levels, which was quite impressive. While I find it too aggressive to bet on third quarter performance being better sequentially, I think the theme will still look very familiar.

Between July and September, overall US retail sales normalized above late 2019 levels, after COVID-19 disrupted the metric in the first six months of the year (see chart below). When in comes to e-commerce, the outlook is even better. Some third-party research suggests that digital sales have more than doubled in the first three quarters of the year, with the third period showing a trend acceleration.

U.S. Retail Sales

Source: Trading Economics

Regarding e-commerce, I also expect Prime Day in the US to be a hot topic of conversation on earnings day – even though the mid-October event should not impact third quarter results. According to Digital Commerce 360, Amazon saw revenues during this key late summer event rise 45% YOY.

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