Amazon Pre-earnings Analysis
Amazon shares reached a new all-time high to kick off the new year, just weeks before the company reports its fourth-quarter earnings. The online retailer’s dominance is expected to continue in these earnings, with revenue set to grow 10.1% compared to the same quarter last year. More impressively, earnings per share are expected to reach $1.52, marking a 51% increase year-over-year. The accelerated growth in profits can be attributed to Amazon Web Services (AWS), which accounts for 60% of the company’s profit. Amazon’s ability to maintain AWS Cloud growth is key to its success, especially with new tariffs on the horizon. Its online store sales rely heavily on imports, making them vulnerable to rising import and export prices.
Looking at the numbers as a whole, Amazon is still in the race with Walmart to be the first to reach $1 trillion in annual revenue. Both companies are battling for big-ticket items to help boost their annual revenue, with Amazon recently inking a deal with Hyundai to support car purchases directly from Amazon’s main site—making the process as easy as possible. This introduction may enhance Amazon’s revenue outlook for the year, which is already expected to reach a new record.
Peering further into its financials, Amazon’s balance sheet boasts nearly $600 billion in assets and $325 billion in liabilities, leaving it with a positive equity of $260 billion. Its dominance extends to free cash flow, which currently stands at $43 billion.
All in all, Amazon is an absolute behemoth of a company and fully deserves its $2.5 trillion valuation. However, there remains an opportunity for improvement in its profit margins—an issue that has long persisted. Amazon has seemingly addressed this through AWS’s high margins, but the company still trades at a price-to-earnings ratio of 50x. Investors want to see an improved profitability outlook to justify the stock’s current highs; otherwise, a correction may be on the horizon to bring the P/E ratio closer to the average range of 15-25x.
Option chain analysis:
Amazon’s option chain expiring on February 7th currently reflects an implied volatility reading of 74%, which translates to about a move of (+/-) $16 in the underlying stock, the direction depends on the earnings outcome.