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Amazon is a Solid Buy Ahead of Q1 Earnings

Tirthankar Chakraborty

The world’s largest e-commerce company, Amazon.com, Inc. AMZN is fast approaching its record high under the leadership of CEO and Founder Jeff Bezos. It is now worth almost $1 trillion, not only due to the growth in the e-commerce segment but also because of its lucrative advertising business and strong cloud hold.

The e-commerce titan had a banner year in 2018, with its shares gaining 30%. It has also fared better than the broader S&P 500’s decline of 2.7% over the period. But, can Amazon continue its upward journey with the first-quarter release on Apr 25? After all, Amazon’s stock has always witnessed price swings whenever it reports earnings results. Let’s take a look —

Ad Business on the Rise

Amazon has become the third-biggest seller of digital advertising in the United States, after Alphabet Inc. GOOGL and Facebook, Inc. FB. And its advertising business has been one of the key profit-growth drivers over the last year. Lest we forget, Amazon generated $10.1 billion in advertising revenues last year, which was nearly 4.3% of its total revenue base. In fact, advertising revenues soared 95% from the year before.

The company’s money-spinning advertising business will surely play a significant part in first-quarter results. Amazon has launched an ad-supported streaming channel, FreeDive via IMDb and an ad-supported music service for Alexa-enabled devices.

AWS Delivers Impressive Growth

Amazon is the undisputed leader in cloud computing, with a 70%-plus market share. The company had claimed that its Amazon Web Services (AWS), the company’s cloud-computing operation, provided the maximum growth, up 45% year over year to $7.43 billion, during the holiday quarter. AWS accounted for around 10% of Amazon’s total revenues.

And now with Apple Inc AAPL being a major customer for its cloud platform, it can easily maintain the trend of promising results this earnings season. This is because CNBC recently reported that Apple is spending more than $30 million a month on Amazon’s cloud despite building its own data storage device.

RBC Capital Markets analyst Mark Mahaney said that AWS is positioned to maintain an encouraging growth rate of more than 40% for the tenth successive year.

Other Opportunities

Amazon has clearly identified its grocery and apparel stores as key growth drivers. A healthy labor market, steady rise in wages and confident consumers are some of the factors that will boost Amazon’s retail business.

At the same time, Amazon has opportunity to expand in India. Mark Mahaney added that “Amazon has built a sizable presence in India since its launch in 2013 and that the company has invested $5 billion to $7 billion and has become one of the two largest e-commerce platforms in the country.”

Stellar Earnings Results Expected

Improvement in ad business as well as blistering growth trajectory in the cloud and, grocery and apparel segments bode well for Amazon’s first-quarter results. Amazon is expected to post $4.61 a share in earnings, up from $3.27 reported a year ago.

 

The Zacks Consensus Estimate call for revenues of nearly $59.7 billion, up about 17% from the same period last year.

 

The Zacks Rank #2 (Buy) company also has an Earnings ESP of +10.65%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Adding to the optimism, the Zacks Consensus Estimate for its current-year earnings has moved up 0.8% in the past 60 days.

Upbeat earnings performance, no doubt, will lead to a rally in the share price. The company’s expected earnings growth rate for the current year is 32.3%, higher than the Internet - Commerce industry’s estimated rise of 0.6%. In fact, the company has outperformed the broader industry in the past year (+30.2% vs +8.6%).

 

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