Amazon stock was pummeled after delivering a second-quarter earnings report that missed estimates, as consumers spent less time online as the Covid-19 restrictions were eased. Now, there’s likely to be a transition period where overall online growth will remain sluggish.
The Amazon (AMZN) earnings report arrived on July 29, after the market close. Revenue of $113.08 billion missed Wall Street estimates of $115.4 billion. Its third-quarter revenue outlook also fell short.
This is the first quarterly earnings report without Jeff Bezos at the helm. Andy Jassy officially took over as Amazon’s chief executive on July 5.
The Amazon second-quarter report comes as the company has exited the toughest part of the Covid-19 pandemic. Amazon scored massively during the pandemic as consumers flocked to online shopping while sheltering at home. The concern now is that it might also usher in more uncertainty about e-commerce growth for the next few quarters
The drop in Amazon stock was its largest decrease since May 1, 2020, when it fell 7.6%. Amazon stock is down 11% from its all-time closing high of $3,731.41 on July 8.
During the conference call, analysts generally seemed to focus on the positive aspects of the Amazon earnings report. This included its cloud computing unit Amazon Web Services, investments in digital content that’s expected to drive Amazon Prime adoption, and Amazon’s rapid expansion of fulfillment centers to support elevated growth. Revenue from Amazon Web Services jumped 37% to $14.8 billion in the second quarter. That’s faster than the 32% growth in the previous quarter.
“Amazon hit an air pocket in near-term demand,” Monness Crespi Hardt analyst Brian White wrote in a note to clients. “However, we believe the company is uniquely positioned to exit this crisis as one of the biggest beneficiaries of accelerated digital transformation. We are lowering our estimates but maintaining our 12-month price of $4,500.”
Third-Quarter Revenue Outlook Falls Short
Amazon expects revenue in the range of $106 billion to $112 billion for its third quarter, below estimates of $118 billion
“This underperformance was primarily due to consumers simply spending less online as they gravitated back to stores and engaged in leisure activities,” UBS analyst Michael Lasser said in his note clients. “Now, there’s likely to be a transition period where overall online growth will remain sluggish. Still, as long as AMZN retains its dominant position, it should continue to see healthy growth from the long-term secular trend of e-commerce.”
Lasser Maintained a buy rating on Amazon stock but lowered his price target to 4,020, from 4,350.
Raymond James analyst Chris Caso cut his price target on AMZN stock to 3,900, from 4,125 but maintained a rating of outperform.
“Despite this near-term deceleration in retail sales, we believe overall growth rates remain healthy and we look for retail growth to reaccelerate in 2022,” Caso said in a note. “We maintain our Outperform rating given 1) expect solid long-term eCommerce growth; 2) Continued leadership and momentum in cloud; 3) robust advertising growth; and 4) an improving long-term margin profile driven by retail scale efficiencies, AWS, and advertising.”
Plenty Of Growth Opportunities
Amazon entered 2021 with plenty of big growth opportunities. This included plans to expand its virtual health care program across the U.S. It is also expanding its prescription drug business.
On March 17, Amazon announced that its telehealth pilot program, called Amazon Care, would expand to all of its U.S. employees and their families as well as other firms this summer. The program first launched at its Seattle headquarters 18 months ago.
If Amazon can deliver more efficient health care services, the potential is enormous for fueling its growth engine — and by extension Amazon stock. Health care now comprises nearly a fifth of the U.S. economy.
Amazon said the program enables workers to connect with medical professionals via chat or video conference, and connect patients with medical professionals. In addition, Amazon Care can dispatch a medical professional to a patient’s home for additional care.
Tapping The Market For Prescription Drugs
In addition, Amazon is tapping into the $350 billion market for prescription drugs. The company fired a big shot across the bow of drugstores and prescription drug wholesalers on Nov. 17 when it launched Amazon Pharmacy. The new unit will offer Amazon Prime members discounts of up to 80% on generic drugs. Or, 40% on brand medications.
On May 26, Amazon announced it is acquiring iconic film studio Metro-Goldwyn-Mayer for $8.45 billion, looking broadly expand its position in streaming video and increase the value of its Prime rewards program. The acquisition is Amazon’s largest since buying Whole Foods for $13.7 billion in 2017.
Analysts attribute a multiyear rise in AMZN stock, in part, to Amazon Prime. Users pay an annual or monthly fee for the service and receive multiple perks. This includes free access to Amazon Video and Amazon Music. Amazon has invested billions of dollars in its film and TV operations as well as live sports.
Another growth vehicle for Amazon in 2021 is advertising. When looking for a product, about half of U.S. adults start their search with Amazon. More searches draw more advertisers. And as Covid-19 has caused more consumers to shop online that will keep Amazon’s ad growth humming.
Technical Analysis Of Amazon Stock
In the stock market, timing is critical. So when you’re looking for stocks to buy or sell, it’s important to do the fundamental and technical analysis that identifies lower-risk entry points that also offer solid potential rewards.
The IBD Stock Checkup tool shows that Amazon stock has an IBD Composite Rating of 77 out of 99. That’s down from 87 a week ago. The rating means Amazon stock currently outperforms 77% of all stocks. That’s in terms of the most important fundamental and technical stock-picking criteria.
But its Relative Strength Rating is a weak 47, down from 53. The rating tracks market leadership by showing how a stock’s price movement over the last 52 weeks measures up against that of other stocks. Ideally, look for stocks with a rating of 80 or higher.
In addition, Amazon’s relative strength line has dropped, which is a negative sign. A stock’s relative strength line compares the stock’s daily price performance to the S&P 500. An upward-sloping RS line means the stock is outperforming the S&P 500. A downward-sloping line means the stock is lagging the S&P 500.
Following the sharp plunge in Amazon stock, it is not a buy.
You’ll also find alerts to warning signs and sell signals that show when to take your profits or cut short any losses. And, you’ll discover if the current stock market trend is conducive to buying stocks, or if it’s an environment where you want to take defensive action and sell.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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