Amazon earnings preview: Prime Day and the holidays mean Amazon will add to its most profitable year

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Amazon.com Inc.
AMZN,
+3.42%
has already had its most profitable year. But with Prime Day 2020 taking place in October and the holiday shopping season still to be accounted for, the e-commerce giant will only add to the tally.

Amazon is scheduled to report fourth-quarter earnings on
Tuesday after the closing bell, and analysts are bullish about the numbers.

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“Strong e-commerce demand through the holiday season coupled
with the addition of Prime Day in the quarter should support robust revenue
growth,” wrote Stifel analysts led by Scott Devitt.

Analysts also forecast 29% growth in AWS revenue.

“Amazon is one of the primary beneficiaries of COVID given
accelerated e-commerce sales growth and Prime membership adoption, as well as
the digital transformation that will accelerate cloud services adoption, which
we expect to see over a longer timeframe,” Stifel said.

Stifel rates Amazon stock buy with a $3,600 price target.

After third-quarter profit tripled to $6.3 billion, or $12.37 a share, Amazon has already had its most profitable year.

See: Amazon has already had its most profitable year ever, and just set a record for sales in a quarter

Even with large investments in areas like fulfillment to keep up with demand, its business is still booming. Capital investments for the first nine months of 2020 nearly reached $30 billion, Brian Olsavsky, Amazon’s chief financial officer, said on the third-quarter earnings call.

COVID-related costs exceeded $7.5 billion in the first three
quarters of the year, and are expected to total $4 billion in the fourth
quarter.

“The resurgence of the pandemic into the winter coupled with
additional stimulus is likely to support strong e-commerce demand in 1H:21,”
Stifel said.

“As the leader in two large and rapidly growing sectors (e-commerce
and cloud), with an emerging high margin marketing business, Amazon remains
well positioned in a recovery scenario given cloud services, marketing services
and certain e-commerce categories/geographies are still in the early phases of
development.”

Wedbush analysts say Amazon’s outlook for the fourth-quarter
was too conservative. Amazon guided for sales between $112 billion and $121
billion in the fourth quarter, up between 28% and 38% year-over-year. Operating
income is expected to be between $1.0 billion and $4.5 billion, up from $3.9
billion in 2019.

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“We acknowledge that cleaning, safety and social distancing protocols cost Amazon billions of dollars in lost efficiency but note that the company’s operating income guidance is lower than its guidance for Q3, despite an expected $6.4 billion of higher sequential gross profit,” analysts led by Michael Pachter wrote.

“While we believe Amazon’s guidance is sincere, we think it
is overly conservative, and we cannot conceive that the company will spend all
of its incremental gross profits on fulfillment, marketing, and COVID-related
expenses.”

Wedbush rates Amazon stock outperform with a $3,900 price
target.

Amazon has an average buy rating and average target price of $3,845.21, according to 48 analysts polled by FactSet.

Here’s what to watch for when Amazon reports:

Earnings: The FactSet consensus is for earnings per share of $7.19, up from $6.47 last year.

Estimize, which crowdsources estimates from sell-side and
buy-side analysts, hedge-fund managers, executives, academics and others,
is guiding for EPS of $9.55.

Revenue: The FactSet consensus is for revenue of $119.72 billion, up from $87.44 billion last year.

The Estimize outlook is for $122.05 billion.

Stock price: Amazon shares are up 8.7% over the last three months, and 64.3% over the last year.

The Amplify Online Retail ETF
IBUY,
+0.51%
has soared more than 141% over the past 12 months. And the benchmark S&P 500 index
SPX,
+1.60%
is up 16.7% for the period.

Other items:

-Truist Securities says the pandemic also helped Amazon’s advertising business, which had been growing 40% year-over-year.

“Our conversations with marketers indicate that sellers
continue to lean in hard on Amazon, given the direct response and high intent
nature of the platform,” wrote Truist in a note.

“Further, as a high margin business, strong advertising
growth is a material source of operating leverage, which offsets higher
shipping and fulfillment costs.”

Truist rates Amazon stock buy with a $3,650 price target.

Watch: Lessons from the pandemic: these sectors helped advisors drive value

-Even as other parts of Amazon business thrived, the Whole
Foods grocery business faced challenges during the pandemic.

“The approach that gave it strength, a focus on urban areas
and high-end products, turned into a significant obstacle as the pandemic raged,”
wrote Placer.ai in a blog post.

Year-over-year average monthly visits fell 24.1% in the third
quarter and were down 18.7% in the fourth quarter.

Placer.ai data shows that visits were down 16.2% in December
2020.

Amazon says it delivered more than 1.5 billion toys, home goods and other items during the holiday season.

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