Stock markets have rallied amid a wider improvement in global equities as risk appetite strengthened and confidence in the recovery returned. Overall this week, equity markets have turned higher. Netflix and Spotify are leading the charge on the tech front, up 8% and 10% respectively following upgrades from Citi, while Tesla has risen 5% after being upgraded by Credit Suisse. Investors are looking ahead to the mega-tech earnings reports this week, which will include Meta Platform (FB) on today and Amazon on Thursday.
Amazon
Amazon is the company that is expected to experience another massive surprise in its Earnings reports. Amazon has a market capitalization of $1.7 trillion as of 23 December 2021, following a more than 6% rise in 2021. Apple, Microsoft, Alphabet, Amazon, Tesla and Facebook added a combined $2.9 trillion to their collective market caps in 2021 as of Dec. 23, according to data from Factset.
The report due on Thursday will be for the fiscal Quarter ending December 2021, which according to Zacks Investment Research, is expected to experience a massive drop of its Earnings Per Share (EPS) compared to last year, at $3.88 from $14.09, which reflects a nearly 73% decline. In Q4, the company’s revenue is seen between $137.87-140 billion with the yearly change seen at approximately 9%. Amazon has beat revenue forecasts in the last nine quarters. The Q4 performance is expected to confirm the negative impact due to global supply chain issues, while it could be a make-or-break moment for the e-commerce giant as markets reassess tech valuations.
The company’s earnings are expected to present a solid boost from record-breaking sales during Black Friday and Cyber Monday and in general the year end holidays. Also, Amazon’s expansion of its e-commerce, distribution network and the improvement of the Prime Free One Day service, and robust grocery services (2-hour delivery service of natural and organic products) are expected to have further boosted Amazon’s online retail business. The expansion of the Same-Day Delivery service to more cities in US (delivery within 5 hours) is anticipated to have been another positive factor for Q4 earnings. Amazon also proceeded with several expansions such as in the global footprint of Prime, Amazon Fresh grocery stores, 4-star stores and Amazon Go outlets, a robotics manufacturing facility in Westborough, etc.
The e-commerce section, similarly to 2020 and 2021, should continue to benefit from remote working and travel restrictions. The continuation of stellar e-commerce, along with the strengthening of Prime Video content, should contribute to Q4 gains. The results of the other streaming giant, Netflix, showed that Amazon has strengthened its position in the streaming sector and upgraded into a dangerous competitor for Netflix.
The biggest part of Amazon’s income is derived from its cloud segment, which includes Amazon Web Services. Amazon Web Services (AWS) posted a significant increase in both sales and operating income year after year, but skyrocketed in 2021 more precisely due to the introduction of AWS Private 5G – which enables enterprises to deploy and scale their 5G mobile network seamlessly, and AWS Amplify Studio — which enables web application user interface creation with minimal coding. Additionally, AWS announced several other services such as AWS IoT FleetWise, AWS IoT TwinMaker, three Amazon Elastic Compute Cloud, four storage services and capabilities, and six capabilities for Amazon SageMaker. Hence all the above have attracted business to Amazon and this will reflect AWS as a key metric for investors in Thursday’s report.
However there are still some key risks for the company, as its expenses remain high according to the Amazon CEO, Andy Jassy, who highlights that:
In the fourth quarter, we expect to incur several billion dollars of additional costs in our consumer business as we manage through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs — all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. It’ll be expensive for us in the short term, but it’s the right prioritization for our customers and partners.
In the equity market meanwhile, the shares of the e-commerce and cloud computing giant are down 13% year to date, however they manage to hold above the 20-month floor at $2700. Amazon’s share price rebounded this week from $2692 lows to $3006. The asset has been seen in a sharp decline since November’s peak along with all the high growth stocks due to the year end but also geopolitical uncertainty and central banks. It is currently retesting the 3000 barrier, however only a break of 3200 could turn the outlook positive again. From a technical perspective the asset is driven by negative bias, given the death cross of the 50- and 200-day SMA, and the negatively configured RSI and MACD.
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Andria Pichidi
Market Analyst
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