Market Is Overwhelmingly Bullish On Amazon.com, Inc. Ahead Of The Q216 Earnings

  • Amazon continues to outperform the market in 2016 as it did in 2015.
  • Echo's hype, AWS strength, a new YouTube-like service, and better than expected results fueled a rally in the stock price this year.
  • Investors should be very cautious as market expectations seem too high at the moment.

E-commerce and tech giant Amazon.com, Inc. (NSDQ:AMZN) is expected to report its Q2 2016 earnings in the upcoming week amidst the rally in the stock price fueled by the success of Echo, the strength of AWS, better than expected earnings, and the execution of Amazon’s biggest sales day ever in Prime Day. Amazon’s Prime Day attracted the attention of many consumers, peer companies, market analysts, and the media. It was also used as a test of the company’s strength and its capability of selling a significant amount of merchandise in a single day, outside the Black Friday/Cyber Monday events.

According to preliminary estimations, Amazon Prime Day added around $550M of incremental sales to the company’s top line, which is more than a 30% increase from the previous Prime Day. However, the bigger focus of Amazon’s Prime Day was to expand Amazon Prime worldwide and increase the user base subscribed to the service in order to strengthen the Prime ecosystem globally. Amazon is estimated to have around 70 million Prime members globally, and the fact that 80% of these members are from the US shows how much Amazon Prime depends on the local market in the US. Expanding Prime overseas could serve as a catalyst for greater growth and as a method to expand Amazon’s video service worldwide and maybe even other Prime services such as groceries, repairs, and more. Moreover, Prime members tend to spend around twice as much on Amazon than non-Prime visitors, and expanding that ecosystem could drive further growth for the company.

One of the most sold items on Prime Day was Amazon Echo, the company's successful wireless speaker and voice commander connected to the Alexa voice service that can not only play music and answer questions but also control smart home devices such as thermostats, lights, and other related systems. Even though Amazon did not release any specific figures for the Echo sales, Amazon reported that Amazon Prime Day was the biggest day ever for Echo, up by more than two and a half times compared with the previous record day. Amazon Echo has been the new Amazon blockbuster since it was launched last year, and it allows Amazon to expand its ecosystem to control smart appliances and other compatible home devices completely, and that is a powerful place for Amazon to be in. The hype around Echo is incredible and having rivals like Apple (NSDQ:AAPL) and Alphabet Inc-C (NSDQ:GOOG) chase Amazon in this segment is a huge thing for the company that brought the Kindle into our lives, and it drives positive investor sentiments.

Amazon had many events besides the Prime Day and the Echo hype that helped the stock price rise. The launch of the YouTube-like Amazon Video Direct service, the freight deal with Atlas Air, the new CPU business, and, of course, the bullish analyst notes that gave Amazon an average target price of $800 with a buy rating. The market is unbelievably bullish on Amazon even though the stock yielded an amazing 115% return last year and another 15% YTD, and this is the time that investors should become cautious and not overlook a possible decline.

In the upcoming earnings, investors should pay careful attention to the company’s global expansion progress, AWS growth, and Prime business, which includes Prime Day data, media revenues, etc., and the amount of merchandise sold this quarter. However, the market expectations from Amazon are high, and anything besides a beat with significant operational performance improvements in all business units alongside global expansion progress will disappoint the market. I believe that these are the most dangerous periods in which to hold the stock. Unlike previous earnings releases, it seems that this one can send the stock price significantly higher or lower to calm down the hype or boost it further.

These are the comparable figures to watch:

Q2 2016 Consensus Q2 2015 Actual
EPS $1.109 $0.2
Revenue $29.54B $23.185B
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