Amazon Q4 earnings preview: Where next for AMZN stock?

When will Amazon report Q4 earnings?

Amazon is scheduled to release fourth quarter and full year earnings after US markets close on Thursday February 2. A conference call will be held on the same day at 1430 PT (1730 ET).

Amazon Q4 earnings consensus

Amazon is expected to report a 6% year-on-year rise in net sales in the fourth quarter of 2022 to $145.7 billion. Operating income is forecast to drop 28% to $2.5 billion and net income per share (EPS) is set to plunge over 85% to $0.21, according to consensus numbers from Bloomberg.

If achieved, Amazon is on course to report an 8.6% rise in annual revenue to $510.4 billion and see full year operating profit – its headline earnings measure – is expected to fall 56% to $11.8 billion.

Amazon Q4 earnings preview

Amazon may find it difficult to impress the markets this week considering virtually all its businesses are finding growth much harder to come by following an explosion in demand for online shopping and technology during the pandemic.

The company has already warned that revenue growth will stall to its slowest pace on record for any holiday shopping season as the boom in ecommerce during lockdowns continues to unwind.  

Its cloud computing arm Amazon Web Services – which provides the bulk of Amazon’s profits – is also starting to see customers tighten their belts and reduce spending due to the uncertain economic outlook that has a recession on the horizon. Growth has slowed for five consecutive quarters already and the fact its biggest rival Microsoft has warned it expects this trend to continue and for budgets to be squeezed further in 2023 suggests the landscape could become more challenging this year. Still, AWS is expected to keep growing at strong double-digit rates, which could prove vital in countering softness elsewhere in the business.

The environment is also putting the foot on the brakes on its smaller units, such as its subscription arm underpinned by Prime and its advertising business – both of which remain vulnerable as the economic downturn continues to brew.

Meanwhile, costs continue to rise at a much faster pace than the topline and are eating away at earnings. Operating costs are forecast to be over 13% higher this quarter than the year before.

Amazon is trying to cut costs in response to rising costs across the business, from energy to fulfilment. The company only trimmed $1 billion of costs off its books in the last quarter, below its $1.5 billion target. However, we could see better progress made on this front going forward considering Amazon has announced it is making 18,000 jobs cuts starting this month.

An acceleration in savings would be welcomed considering markets are rewarding those that have started to cut jobs and costs.

The ecommerce giant, which is much more labour-intensive than its rivals, has seen its overall workforce more than double in size since the start of the pandemic but now, with earnings under pressure, Amazon is having to reverse this and start trimming the fat. Still, the 18,000 roles represent just 1.1% of its total employees and around 5% to 6% of its 300,000 to 350,000 corporate workers. That suggests the cut is shallow and that more could follow if economic conditions deteriorate further in 2023.

The outlook will prove influential on how markets react as investors evaluate what could be on the horizon in 2023. Wall Street anticipates Amazon can deliver $125.3 billion in net sales and $3.3 billion in operating profit in the first quarter. A miss here, or any disappointing view of the year ahead, is almost guaranteed to apply pressure on the stock.

What to expect from Amazon in 2023

2022 will be a year to forget for Amazon as growth stalled, earnings fell, and its share price plummeted. But markets expect the company to rebound this year as it starts to come up against more normal comparatives – although it is expected to grow at a much slower pace than investors have become accustomed to over the years.

The fourth quarter of 2022 is expected to be the trough for topline expansion, which is expected to start accelerating again throughout 2023. Operating profit is expected to swiftly recover too. For the full year, Wall Street believes Amazon will grow sales by 9.7% and that operating profit will jump over 71%. Cashflow is also expected to improve markedly as it gets a better handle on costs and benefits from easing inflation.

Amazon currently trades at a blended-forward price-to-earnings ratio of 34.7x. That is far above the market average and any other member of Big Tech because Amazon is not as profitable and its valuation is driven more by its growth prospects. With growth harder to come by, that multiple has fallen from its five-year average of over 50.0x. In terms of sales, Amazon’s market cap is equal to less than two years’ worth of revenue. 

There is an argument to keep an eye on Amazon. Its share price is currently trading below where it was before the pandemic began and yet, the company is considerably larger now than it was back in 2019. Annual sales have grown over 80%. The number of Prime members around the world is thought to have grown from around 150 million to somewhere in the region of 200 to 250 million today. Sales and profits from Amazon Web Services have more than doubled in the last three years alone. Its advertising business has seen its topline treble and shows evidence of how newer ventures have added new catalysts that can deliver growth over the long term. This suggests, if markets believed in Amazon’s valuation back in 2019, then they should see upside from today’s prices.

However, what has changed is that profits are now below pre-pandemic levels and, more importantly, that Amazon’s growth prospects have effectively been reset this year. Amazon has delivered annual sales growth between 20% to 40% each year since the financial crisis but markets currently think it will deliver much slower growth from now on. This is a hindrance since its valuation is skewed toward its growth prospects. With that in mind, Amazon will need to provide new catalysts for investors to get excited about and show it is gaining market share during tougher times. Failing that, we could see Amazon start to shift its focus more toward profitability if growth remains subdued for a prolonged period.

Where next for AMZN stock?

Amazon shares have risen over 20% since hitting fresh post-pandemic lows toward the end of 2022.

The stock managed to close above $99 yesterday after two weeks of failed attempts and it now needs to hold this level. If it can gain momentum then it is on course to climb to $101.80, approaching the 100-day moving average and marking the floor we saw back in May and June last year. The 200-day moving average would then come into play before it can attempt to make a larger jump to over $125 to recapture the June 2022-high. The 52 brokers that cover the stock see greater upside potential with an average target price of $134.85.

On the downside, the 50-day moving average, currently at $91.30, has shown a sign of providing some support in recent weeks if the stock fails to hold the $99 level. The post-pandemic low $81.70 (only just a fraction above the lows seen in March 2020) would swiftly come back into play below here.

Take advantage of extended hours trading

Amazon will release earnings after US markets close and most traders must wait until they reopen the following day before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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