The big week of tech gains is about to heat up. On “Super Thursday,” at least 35% of the Nasdaq 100 (QQQ) will report the results of the second calendar quarter, all within minutes after the closing bell. Aside from Apple (AAPL), a company that I keep a close eye on, I’ll definitely be paying attention to Amazon’s numbers (AMZN).
In February, he believed 2020 would be “Amazon’s return year” and I doubled my optimism last month. I think the second quarter will reinforce optimism with this name, even if some investors may be justifiably concerned about valuations at current levels.
Credit: Kalinga TV
A great room for e-tail
I would be very surprised to see that Amazon publishes anything but solid results in its large e-commerce segments (61% of total 2019 revenue in North America, 27% in international markets). My optimism is based less on a hunch than an observation of the available data.
Retail sales in the US decreased and flowed in the second quarter, as the chart below suggests. April marked what was perhaps the worst month of retail sales in the country’s modern history. But the recovery in May and June was quick and much better than expected. Of course, regarding Amazon’s ecommerce business, a closer look under the hood is needed.
Source: Trading Economics
Even in April, when the overall retail sector seemed to crumble, non-commercial sales increased by a healthy 8% as the country took refuge on the spot and bought from home security. The month of May saw a similar increase that, granted, paled in comparison to the performance of other retail channels. In June, sales outside the store soared in more than 23%. These are all macro-level numbers that don’t account for Amazon’s likely gain in market share over its competitors.
I also expect Amazon’s international division to produce solid results in the second quarter. In many countries around the world, the COVID-19 crisis and the resulting economic impact have been better addressed than in the United States. Therefore, the 1Q20 momentum, when revenue increased 17%, should continue until the most recent period.
Cloud growth could slow down
Amazon’s cloud platform and infrastructure business saw an impressive revenue increase of nearly 33% yoy in the first quarter. However, judging from the results reported by key competitor Microsoft (MSFT), growth may be slightly below the numbers in early 2020.
The chart below shows the quarterly acceleration and deceleration in Azure’s revenue growth rate since the start of the 2017 calendar. Note that the decline in the most recent quarter was the steepest during the three and a half year period (all the numbers below are in percentage points.) While Microsoft has rated the results “in line with expectations,” the recovery in cloud adoption in the March quarter may have slowed this time, for both Azure and AWS.
Source: DM Martins Research, using data from multiple reports.
I wouldn’t worry too much about possible cloud softness for a couple of reasons. First, the COVID-19 crisis has created short-term distortions that may not persist in the long term. Furthermore, AWS remains a small business from a front-line perspective: only around 12% of total revenue in 2019. AWS’s contribution to Amazon’s operating profit is much more significant.
So a bit of stagnation in revenue growth for the foreseeable future should be less of a factor in Amazon’s financial results than margin trends, which I hope will be positive over time as the business continues to win. scale.
Expensive for a reason
In the end, I expect 2Q20 to be a great quarter for Amazon. Sure, the cloud may not impress investors this time, and the costs associated with operating amid a global pandemic (for example, supply chain redundancies, increased payroll, higher wages, and front-line bonuses. , protective equipment, cleaning facilities) will make earnings appear unusually weak. Still, the strength of e-commerce should drive substantially higher revenues, which is likely to lead to top-line growth that achieves the highest range of management orientation.
Data by YChartsLooking ahead, I still see Amazon as a compelling buy-and-hold bet. Yes, valuations have skyrocketed, as the chart above suggests. EV free cash flow, for example, has increased from 40x in March 2020 to over 75x now.
Still, I think AMZN is expensive for very good reasons. Not only is the company a dominant force in e-commerce and the cloud, two businesses that are unlikely to dampen momentum anytime soon, but Amazon has also proven to perform well in times of macroeconomic weakness.
I remain firm in my belief that AMZN can go even higher from here, perhaps even to $ 2 trillion before Apple and Microsoft can reach the same milestone.
Beating the market for a mile
Amazon and Microsoft have been key contributors to the performance of my All-Equities storm-resistant growth since its inception. But other mega-layer names have produced an even bigger slice of the portfolio’s profits, which have been better than the S&P 500 by a mile (see chart below, pink line).
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Divulge: I am / we are long AAPL, AMZN, MSFT. I wrote this article myself and express my own opinions. I receive no compensation for it (other than Seeking Alpha). I have no business relationship with any company whose shares are mentioned in this article.
