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Amazon Q2 Earnings Preview: Strong Growth But Rising Costs Will Hurt Profits

  • Reports Q2 2020 results on Thursday, July 30, after the close
  • Revenue expectation: $81.09B
  • EPS expectation: $1.38

Investors in the e-commerce powerhouse Amazon.com (NASDAQ:AMZN) have little to worry about, particularly these days. The company’s business model perfectly positions it to expand its e-tail dominance even more broadly as the global COVID-19 pandemic continues to flare.

Given the need to distance and in many cases stay at home, more and more people are making purchases online.

That strength will be on display when the Seattle-based company reports its second quarter earnings. The release will likely show sales growth of 28% when compared with the same period a year ago.

AMZN Weekly TTM

AMZN Weekly TTM

Expectations of explosive growth have fueled a massive rally in Amazon shares, which surged 62% this year. The stock closed yesterday at $3,000.33, slightly lower than its record high.

Though Amazon’s online marketplaces generate most of the company’s revenue, that’s not the most profitable segment. Amazon is also the world’s largest cloud infrastructure provider, with Amazon Web Services (AWS) generating the largest share of the profit.

As well, AWS is a high-margin business that allows Amazon to provide cash funding to develop and expand its marketplace strategies, including aggressive promotions and cheap hardware devices. The unit posted a 33% surge in sales during Q1 and will likely show another strong performance as companies shift their data to servers provided by Amazon.

However, along with these highly favorable growth conditions, Amazon’s costs are also increasing. The company has already warned investors that Q2 will be tough when it comes to showing bottom-line profitability, as it boosts spending to keep logistics operations running smoothly during the coronavirus pandemic.

“Under normal circumstances, in this coming Q2, we’d expect to make some $4 billion or more in operating profit,” Amazon CEO Jeff Bezos said in April.

“But these aren’t normal circumstances. Instead, we expect to spend the entirety of that $4 billion, and perhaps a bit more, on Covid-related expenses getting products to customers and keeping employees safe.”

Escalating costs, however, shouldn’t worry the company’s long-term investors. Bezos has had a good track record of producing results by investing in new data centers and warehouses to extend its e-commerce capacity.

These bets have paid off big-time in the past, reinforcing the company’s wide competitive advantage in e-commerce.

Bezos is also opening several new areas of growth beyond the low-margin business of selling goods online. Amazon’s digital advertising business, another high margin venture, is rising at a triple-digit rate.

Backed by these extremely profitable units, Amazon has been able to disrupt an array of industries and can continue to do so for a long time.

The company also has a hardware unit which produces a broadening line of smart speakers and video streaming gadgets. Its Amazon Studios division makes original television shows and movies and is beginning to challenge Netflix (NASDAQ:NFLX) and HBO (NYSE:T).

As for the brick-and-mortar retail space, Amazon hasn’t been secretive about its ambitions in that arena either. It acquired grocery purveyor Whole Foods Market in 2017 and is now building a fleet of cashier-less convenience stores.

Bottom Line

Amazon may not show a profit during tomorrow’s earnings report. Nevertheless, its sales should continue to expand.

For long-term investors, any temporary setback should be a buying opportunity in the Amazon stock which is a great bet to take advantage of the global digitization.

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