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- Amazon is set to report its third quarter earnings after the bell on Thursday, but all eyes will be on guidance.
- The third quarter is expected to be one filled with COVID-19 related safety investments and expansion of its fulfillment capacity, which could put a dent into profits.
- But fourth quarter guidance surrounding its October Prime Day event and the holiday shopping season should have a sizable impact on the direction of Amazon's stock price.
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Amazon will release its third quarter earnings report after the market close on Thursday, with all eyes glued to its fourth quarter guidance.
While the third quarter is expected to be market by higher costs driven by COVID-19 related investments and fulfillment capacity expansion, its current quarter is poised to reap those benefits.
Fourth quarter guidance will be closely watched as it will include for the first time ever both results from Amazon's once-a-year sales event, Prime Day, as well as the holiday shopping season.
The results and outlook should give a read into how the consumer is holding up amid the COVID-19 pandemic and sharpest economic decline since the Great Depression.
Here's what four Wall Street analysts expect from Amazon's third quarter earnings report.
1. Goldman Sachs
Rating: Buy
Price Target: $4,200
"We expect Amazon to report Q3 results above consensus expectations on revenue and profitability given continued retail outperformance, particularly in North America, and ongoing growth in both the higher margin AWS and advertising businesses. We expect Q4 guidance to come in above consensus for both revenue and operating income as the company sees the combined impact of the current pandemic on the seasonal demand of Q4 and scales newer infrastructure/delivery initiatives," Goldman said.
"We believe the market continues to underestimate the long-term value of the Amazon platform as the leader in both the movement of retail online and compute into the cloud. Therefore, we continue to believe Amazon represents the best risk/reward in the Internet sector," Goldman concluded.
2. Bank of America
Rating: Buy
Price Target: $3,560
Bank of America laid out the bull and bear case for Amazon's third quarter earnings report.
Bull case: "Less deceleration than expected as penetration remains elevated, with 4Q revenue guidance also ahead of Street on Prime Day shift to 4Q."
Bear case: "Rev[enue] deceleration exceeds projections as offline retailers gained ground in 3Q, and AWS margins miss, fueling concerns that longer-term deals are being done at lower margins."
In terms of the conference call, BofA will be watching the following: "1) Potential 4Q deceleration given conservatism offset by Prime Day; 2) AWS commentary with possible near-term economic impact on workloads and new spending; 3) Impact of expansive fulfillment and logistics capacity build out on 4Q unit growth and margins."
"We see Amazon as well positioned for Holiday 2020 with the product mix more balanced, enhanced logistics capacity, and 100k new fulfillment employees. With the stock up 74% YTD (vs. S&P up 5%), expectations are high, and we think Street focus will be on expected duration of demand uptick, progress in consumables, ability to cut costs when trends normalize, Prime member adds, and advertising progress," BofA concluded.
3. Deutsche Bank
Rating: Buy
Price Target: $4,050
"We remain bullish on Amazon and look for elevated growth to continue through the holiday season as retail foot traffic remains depressed, more fulfillment center capacity comes online, and the company benefits from significant owned last mile delivery capability with [Amazon Logistics]," Deutsche Bank said.
The firm forecasts a slowdown in growth for AWS to 27.4%, but thinks "near-term results here are less meaningful given our work suggests that the pandemic is causing enterprises to ultimately plan to move more to the cloud over the medium term, setting the stage for re-acceleration in AWS revenue growth in 2021."
Deutsche Bank sees upside potential to its $5.0 billion operating income estimate, with $3.4 billion coming from AWS and another $1.6B from the retail segment.
4. Stifel
Rating: Buy
Price Target: $3,500
Stifel expects Amazon to continue posting strong growth as retail spend shifts to online amid the COVID-19 pandemic. Revenue growth of 33% year-over-year in the third quarter is expected by Stifel, along with an operating margin of 5.3%, which is ahead of consensus estimates.
Stifel highlights that Amazon is anticipated to have invested $2 billion in COVID-19 related initiatives as well as ramped up investment in fulfillment capacity to support stronger volume ahead of the holiday season.
"This quarter, Amazon faces a more difficult compare given the record Prime Day in the prior year along with a number of one-time items that elevated 3Q:19 revenue. Third party eCommerce sales figures from Adobe pointed to deceleration in July as offline stores reopened, with further slowing into Labor Day, though eCommerce sales remain well above pre-COVID levels," Stifel said.
"The backdrop for eCommerce remains favorable as we enter the holiday season and we believe Amazon should remain a core holding," Stifel concluded.
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