Amazon’s ad and cloud segments could be second quarter’s silver lining, analyst says

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Amazon Stocks (NASDAQ: AMZN) have plunged 29% since the start of the year as the e-commerce giant battles runaway inflation which is reflected in higher operating costs. Higher costs also concerned Wedbush analyst Michael Pachter. However, the analyst remains bullish on the stock and thinks the company’s Ad and Cloud segments could very well be the silver lining.

On Monday, July 25, Reuters reported that Amazon will increase its annual Prime membership fees in Europe by up to 43%, effective September 15. The report says the company cited “increasing inflation and operating costs” as reasons for the price increase.

Amazon is expected to announce its second quarter results on July 28.

Amazon’s outlook for the second quarter

Amazon expects net sales to be between $116 billion and $121 billion in the second quarter, up 3% to 7%. This guidance assumes a negative impact of 200 basis points from currency fluctuations.

Wall Street analysts expect Amazon to generate $119.1 billion in revenue. Pachter forecast revenue of $121 billion in the second quarter.

Earnings are expected to reach $0.12 per share according to analysts.

As for analyst Pachter’s revenue projections, he admitted that these could prove to be “too optimistic” due to higher inflation.

Inflation could be a major challenge for Amazon

The analyst added that while higher inflation could benefit Amazon’s retail business through “higher market prices and fees” ranging from 8% to 15%, the rise in inflation could also lead to lower discretionary consumer spending.

Pachter cited the University of Michigan’s Consumer Confidence Index, which “identifies inflation as the top concern for consumers, with 47% of respondents noting that their standard of living has been eroded by the sharp rise in prices.” .

As a result, the analyst expects non-Amazon Web Services (non-AWS) revenue could fall in the range of 2.5% to 5% year-over-year in the second quarter, while the ad “would equate to approximately 5-10% of online store sales in Q2:21. »

Higher costs could weigh on Amazon’s profits

Amazon management had said on its first-quarter earnings call that it “expects to incur approximately $4 billion of these additional costs in the second quarter.” These incremental costs include fixed costs related to the additional capacity of its transmission and fulfillment network and higher operating costs due to inflation.

Pachter expects “labour costs could also weigh on earnings due to high attrition rates and unfilled U.S. vacancies of about 11.5 million in the first quarter. “.

The analyst predicts that in the third quarter, Amazon could be heading for “mid-single-digit” revenue growth and “online EBIT”. [Earnings Before Interest and Taxes].”

The Taking of Wall Street

Pachter cut his price target from $3,500 to $175 on the stock, adjusting Amazon’s 20-to-1 stock split. The analyst added: “The recent 20-to-1 stock split briefly lifted stock prices, but it will likely take a significant shift in the broader macroeconomic outlook before investment sentiment changes.”

Over the long term, the analyst expects Amazon to see its margins steadily increase “thanks to its cloud and advertising businesses”.

Besides Pachter, other Wall Street analysts are also bullish on the stock, with a strong buy consensus rating based on 40 buys and one hold. Amazon’s average price target of $171.84 implies upside potential of 42.1% at current levels.

Conclusion

While macro concerns will continue to weigh on Amazon’s retail business, that could be offset by growth in its advertising and cloud services businesses.

Amazon scores nine out of 10 on the TipRanks Smart Score system, indicating the stock is very likely to outperform the market.

The TipRanks Smart Score system is a quantitative, data-driven scoring system that analyzes stocks on eight main metrics and offers a Smart Score ranging from 1 to 10. The higher the score, the more likely the stock is to outperform the market .

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