Amazon Q1 earnings: another unpleasant report – Stock Market News
April 26, 2023 12:26 pm
The giant tech company Amazon.com will publish its first quarter earnings for 2023 on Thursday after the market closes. Investors have not set the bar high, projecting an uneventful release given the current challenging macroeconomic conditions. Still, the company’s outlook on future activity is something that will attract special attention as the tech world enters the new era of artificial intelligence. A brighter-than-expected guidance is probably needed to power Amazon’s efforts for a bullish trend reversal in stock markets.
Cost efficiency in focus
It’s uncertain whether the global economy will experience a soft or hard landing in the coming years, but the continuous layoffs announced by several US behemoth tech companies including Amazon have fed speculation that the global economy might be already in the contracting phase of a cycle. The fast tightening in financial conditions during the previous months in combination with the pent-up demand fizzling out after an astronomic expansion during the pandemic made businesses more cautious in spending, especially in the tech sector, which is relatively more vulnerable to rising interest rates.
Of course, history has shown that the gang of four (Meta, Alphabet, Amazon, Apple) could survive or even flourish in a painful recession while other small and medium enterprises could sink. Nevertheless, improving cost efficiency is central to all businesses and particularly to diversified multinational companies. Perhaps this is probably what Amazon and its peers are aiming to achieve by cutting jobs in mature segments such as retail and advertising after a tough year of falling profits.
Q1 earnings may not be exciting
The first quarter of 2023 was not very pleasant either, according to forecasts. Total revenue is expected to have increased at the softest pace in decades by 6.9% y/y to $124bln compared to the same period a year ago.
Amazon’s leading web services segment (AWS), which has been the only contributor to growth over the past few years and on top of Microsoft’s Azure and Google’s cloud, may have marked a relatively feeble expansion of 15.7% y/y versus the 36.50% growth it experienced in Q1 2022. If materialized, that would be a record-low growth.
Earnings per share (EPS) could disappoint too, with analysts estimating a decline of 43% y/y to $0.21 from $0.35 in the same period last year.
Tax provisions to increase
In other indicators, net income is expected to shrink by 42.23% mainly on the back of heightened tax provisions. Following significant cuts in the amount of income tax estimated to be paid during the previous years, the company is forecast to boost provisions by around 135% y/y in Q1 probably on the back of the Inflation Reduction Act, which takes effect this year. Unlike the current tax code, which allows Amazon to take advantage of tax breaks or pay no taxes at all despite the harsh criticism, Biden’s new tax law will require a minimum level of taxation.
Overall, the results might be another disappointment, but Amazon still has plenty of fans. The consensus recommendation from Refinitiv and Wall Street analysts remains “strong buy”, even though the stock is considered quite expensive, trading 61x its earnings according to the 12-month forward P/E ratio. That is still a huge valuation compared to Microsoft’s and Alphabet’s equivalents and way above the industry average.
What would make an expensive valuation reasonable?
Nevertheless, high-growth models such as those in the new revolutionary Artificial Intelligence era could be worth the valuation premium in the future. Amazon’s CEO Andy Jassy revealed to shareholders that the company is investing heavily in the same technology that underpins ChatGPT and other large language models with the scope to offer low-cost, best-quality learning chips to small and large companies. Although Amazon is currently lagging behind Microsoft and Google in the new AI innovation cycle, investors would be eagerly waiting for an extra explanation of how promising the years are ahead.
Note that Amazon’s list of merger and acquisition deals continues to grow, including one Medical in an all-cash deal in November 2022, while its proposal for iRobot keeps facing long antitrust investigations.
Amazon’s stock
Turning to stock market performance, Amazon is still down by around 29% year-on-year compared to the Nasdaq’s negligible loss of 2.9%. That said, the market structure has improved in 2023, with the stock outperforming major US indices year-to-date (+22%).
Technically, the stock marked a new higher low at $88.00 in March after revisiting the pandemic’s lows in January. Traders are currently waiting for a sustainable move above the 200-day simple moving average (SMA) and the tentative resistance line at $108.22 in order to target the 50% Fibonacci retracement of the August-December 2022 downtrend at $113.55. A positive earnings surprise and improving margins, as well as a brighter-than-expected outlook for the upcoming quarters, could favor the bulls.
Alternatively, if Amazon misses its revenue target and paints a blurry picture for the coming months amid a fragile macro environment, the stock may slide below the 20-day SMA at $102.22 and head for the 50-day SMA at $98.00. Slightly lower, the tentative support trendline at 94.00 may prevent sharper declines.
The giant tech company Amazon.com will publish its first quarter earnings for 2023 on Thursday after the market closes. Investors have not set the bar high, projecting an uneventful release given the current challenging macroeconomic conditions. Still, the company’s outlook on future activity is something that will attract special attention as the tech world enters the new era of artificial intelligence. A brighter-than-expected guidance is probably needed to power Amazon’s efforts for a bullish trend reversal in stock markets.
Cost efficiency in focus
It’s uncertain whether the global economy will experience a soft or hard landing in the coming years, but the continuous layoffs announced by several US behemoth tech companies including Amazon have fed speculation that the global economy might be already in the contracting phase of a cycle. The fast tightening in financial conditions during the previous months in combination with the pent-up demand fizzling out after an astronomic expansion during the pandemic made businesses more cautious in spending, especially in the tech sector, which is relatively more vulnerable to rising interest rates.
Of course, history has shown that the gang of four (Meta, Alphabet, Amazon, Apple) could survive or even flourish in a painful recession while other small and medium enterprises could sink. Nevertheless, improving cost efficiency is central to all businesses and particularly to diversified multinational companies. Perhaps this is probably what Amazon and its peers are aiming to achieve by cutting jobs in mature segments such as retail and advertising after a tough year of falling profits.
Q1 earnings may not be exciting
The first quarter of 2023 was not very pleasant either, according to forecasts. Total revenue is expected to have increased at the softest pace in decades by 6.9% y/y to $124bln compared to the same period a year ago.
Amazon’s leading web services segment (AWS), which has been the only contributor to growth over the past few years and on top of Microsoft’s Azure and Google’s cloud, may have marked a relatively feeble expansion of 15.7% y/y versus the 36.50% growth it experienced in Q1 2022. If materialized, that would be a record-low growth.
Earnings per share (EPS) could disappoint too, with analysts estimating a decline of 43% y/y to $0.21 from $0.35 in the same period last year.
Tax provisions to increase
In other indicators, net income is expected to shrink by 42.23% mainly on the back of heightened tax provisions. Following significant cuts in the amount of income tax estimated to be paid during the previous years, the company is forecast to boost provisions by around 135% y/y in Q1 probably on the back of the Inflation Reduction Act, which takes effect this year. Unlike the current tax code, which allows Amazon to take advantage of tax breaks or pay no taxes at all despite the harsh criticism, Biden’s new tax law will require a minimum level of taxation.
Overall, the results might be another disappointment, but Amazon still has plenty of fans. The consensus recommendation from Refinitiv and Wall Street analysts remains “strong buy”, even though the stock is considered quite expensive, trading 61x its earnings according to the 12-month forward P/E ratio. That is still a huge valuation compared to Microsoft’s and Alphabet’s equivalents and way above the industry average.
What would make an expensive valuation reasonable?
Nevertheless, high-growth models such as those in the new revolutionary Artificial Intelligence era could be worth the valuation premium in the future. Amazon’s CEO Andy Jassy revealed to shareholders that the company is investing heavily in the same technology that underpins ChatGPT and other large language models with the scope to offer low-cost, best-quality learning chips to small and large companies. Although Amazon is currently lagging behind Microsoft and Google in the new AI innovation cycle, investors would be eagerly waiting for an extra explanation of how promising the years are ahead.
Note that Amazon’s list of merger and acquisition deals continues to grow, including one Medical in an all-cash deal in November 2022, while its proposal for iRobot keeps facing long antitrust investigations.
Amazon’s stock
Turning to stock market performance, Amazon is still down by around 29% year-on-year compared to the Nasdaq’s negligible loss of 2.9%. That said, the market structure has improved in 2023, with the stock outperforming major US indices year-to-date (+22%).
Technically, the stock marked a new higher low at $88.00 in March after revisiting the pandemic’s lows in January. Traders are currently waiting for a sustainable move above the 200-day simple moving average (SMA) and the tentative resistance line at $108.22 in order to target the 50% Fibonacci retracement of the August-December 2022 downtrend at $113.55. A positive earnings surprise and improving margins, as well as a brighter-than-expected outlook for the upcoming quarters, could favor the bulls.
Alternatively, if Amazon misses its revenue target and paints a blurry picture for the coming months amid a fragile macro environment, the stock may slide below the 20-day SMA at $102.22 and head for the 50-day SMA at $98.00. Slightly lower, the tentative support trendline at 94.00 may prevent sharper declines.
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