Earnings preview: Amazon

• Amazon to report Q1 earnings after market close

• Sales growth seen near upper limit of company's guidance

• Huge drop in profits expected

• Cloud segment expected to show another quarter of over-30% growth

• Stock tested $2,750 support zone yesterday

Amazon and Apple are the final two of US mega tech companies to report earnings for the first quarter of 2022. Both reports will be released after the close of the Wall Street session today. Amazon is expected to show another quarter of net sales growth although it is expected to moderate. However, AWS cloud segment is expected to show another quarter of over-30% growth. Let's take a quick look at what the market expects from Amazon and what to focus on during earnings release.

Sales expect to grow but profits seen lower

Market expects Amazon to deliver another quarter of sales growth. Median estimate points to a 7.3% YoY growth in overall net revenue during the quarter, which would be a result near the upper limit of the company's own forecast range (3-8% growth). Interestingly, the company is expected to report lower year-over-year sales at its Online Stores segment. However, it should be noted that Amazon faces tough comparisons as Q1 2021 was still hugely impacted by increased online spending due to Covid pandemic. On the other hand, the US e-commerce giant is expected to report an over 40% drop in earnings. While this may be worrying, it should be noted that Amazon has a good track record of beating EPS estimates.

Net sales: $116.4 billion (+7.3% YoY)

• Online stores net sales: $51.52 billion (-2.6% YoY)

• Physical Stores net sales: $4.3 billion (+9.7% YoY)

• Third-Party Seller Services net sales: $24.99 billion (+5.3% YoY)

• Subscription Services net sales: $8.55 billion (+12.8% YoY)

• AWS net sales: $18.25 billion (+35.2% YoY)

EPS: $8.40 (vs $15.79 in Q1 2021)
Operating income: $5.43 billion (vs $8.86 billion in Q1 2021)

While expectations of an almost-50% drop in Amazon's EPS look worrying, one should keep in mind that company has a solid track record of delivering massive earnings beats in the post-pandemic environment. Source: Bloomberg, XTB

What to focus on?

While sales growth in Amazon's e-commerce business is moderating after a pandemic boost, the company is expected to see another quarter of strong growth in its cloud business - Azure Web Services (AWS). Net sales in the AWS segment are expected to increase 35.2% YoY in Q1 2022, bringing the segment's two-year combined growth to nearly 80%. Focus will be on cloud as it is a high margin business and potential a future prime driver of company's earnings. While AWS accounted for just 12.5% of Amazon's revenue in 2021, it also generated 63.3% of the company's total operating profit. Investors will therefore weigh the growth outlook for AWS business against factors that may potentially harm the company's main e-commerce business, like for example inflation or higher labor costs. Amazon will also provide guidance for Q2 2022. Market expects net revenue to reach $125 billion in the current quarter and operating income to reach $6.84 billion.

A look at the chart

Taking a look at Amazon chart (AMZN.US) at D1 interval, we can see that the stock dropped to the $2,750 support zone. This zone is marked with a 50% retracement of the whole post-pandemic recovery move and has been tested twice recently. Bulls managed to defend the area both times but whether the situation repeats this time as well is likely to depend on earnings release. Quarterly reports like Netflix or Meta Platforms triggered massive share price moves so one cannot rule out that Amazon will also experience elevated volatility. In case earnings release provides support for the stock and we see another recovery from the $2,750 area, attention will shift to the resistance zone ranging between $2,930-2,970, that also hosts 38.2% retracement of the post-pandemic recovery move.

Source: xStation5