Amazon pre-earnings: What to expect in Q2?

The earnings season is almost here and investors will be waiting to see the performance of several companies in what could be the worst quarter in decades. The COVID-19 pandemic has decimated the traditional retail sector but e-commerce companies including Amazon (NASDAQ: AMZN) and Shopify (NYSE: SHOP) have largely been immune to the dreaded virus and are trading near record highs.

In fact, as retail shops and malls have shut down, people have turned to online platforms to satisfy their shopping urges and accelerated the e-commerce trend. Amazon stock is trading at $3,000, which means it has risen 60% in 2020, easily crushing broader market returns.

Let’s see what Wall Street expects from this tech giant in Q2 and if Amazon stock can move higher post its quarterly results.

Amazon sales expected to grow 27.3% in Q2

Analysts tracking Amazon stock expect the company to post sales of $80.72 billion in the second quarter of 2020, indicating a year-over-year growth rate of 27.3%. However, its earnings are estimated to slump 74% to $1.34 per share.

Comparatively, analysts expect company sales to rise by 23.7% to $347 billion in fiscal 2020 and EPS to fall 18% to $18.9. Amazon has failed to meet analyst earnings projections in three of the last four quarters. It missed estimates of $6.25 in Q1 by 20% while in Q3 and Q2 of 2019, it missed by 8.4% and 6.3% respectively.

Amazon generates a majority of sales from its online retail segment, which is a low-margin business. Now, amid the COVID-19 pandemic, the company will be spending heavily on employee safety, which will drive operating costs higher.

However, Amazon has largely focused on top-line growth since its inception and this strategy has held it in good stead over the years. In case the company misses EPS forecasts in Q2, Amazon stock might trade lower but it will be just a matter of time before it regains lost ground.

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Will Amazon stock continue to crush the broader market in 2020?

Amazon stock has been one of the top picks in the last decade. Shares have gained over 2,400% in the last 10 years. Comparatively, the S&P 500 is up 187% while the Technology Select Sector ETF (XLK) has returned 386% since July 2010. But is Amazon’s growth rate sustainable?

Amazon is the largest online retailer in the world and while the pandemic has driven shoppers online, this trend is here to stay. Amazon is also the largest players in public cloud, a market leader in online streaming, owns the largest game streaming platform and is the third largest digital ad platform. We can see that the tech behemoth has multiple growth drivers that will continue to push revenue growth in the upcoming decade.

Amazon stock’s valuation is sky-high and may warrant a pullback. Its trading at a forward price to earnings multiple of 160x and a price to book value of 24x. An economic slowdown may reduce retail demand while there may also be near-term supply chain issues due to the virus.

However, over the long-term, the company remains one of the top places to park your hard-earned savings. Amazon is trading at a market cap of $1.6 trillion and may the first company to reach a $2 trillion valuation.

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