How to play Amazon before its results report

<p>Amazon (NASDAQ: AMZN) is expected to report first quarter results on April 30. To date, the AMZN share has increased by approximately 30%. By definition, a new bull market has started in AMZN shares.

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Therefore, many investors wonder if it may be too late to join the party in the shares.

Basic catalysts are likely to drive Amazon stock even higher in the coming quarters. From now until May 1, however, the share price is likely to be uneven, with potentially a downward bias. If you do not currently own AMZN shares, you may want to wait until you analyze the quarterly statistics. Still, investors with a time horizon of two to three years may want to buy the valleys.

Here’s why.

Amazon stock and the pandemic

CEO and founder Jeff Bezos has recently released his annual shareholder letter. This year, his emphasis was on the Covid-19 pandemic and the company’s efforts to navigate the disaster.

Bezos was not shy about how the company’s e-commerce business had become important in reaching households and delivering particularly important items in these extraordinary times.

When the new coronavirus outbreak hit our beaches, one of the first migration measures was to hire 100,000 employees in March. It also raised its minimum wage at the end of April. Another 75,000 are expected to join the group soon.

The company sees Covid-19 testing for its employees as well as the nation as an important step in ensuring that our economy can open up and start operating at normal capacity. The emphasis on testing potentially shows that Bezos does not necessarily believe that life for most people will soon return to where it was at the beginning of the year.

The letter also highlighted how Amazon Web Services, or AWS, is breaking into customers. Most investors are always interested in learning more about the success of the AWS business. In recent years, AWS’s revenues and operating profit have increased extremely rapidly. During the fourth quarter, AWS revenue was $ 9.95 billion, compared to expectations of $ 9.81 billion.

Since February, a large number of hospitals, pharmaceutical companies and research laboratories have relied on AWS. And Amazon’s cloud services have the infrastructure to meet those needs.

In summary, the shareholder letter had a cautiously optimistic tone for investors in Amazon shares. And its latest price action can be seen as a reflection of the positive mood as well. So far in April, the AMZN share has increased by approximately 24%. By comparison, the Nasdaq composite has increased by about 11%.

What to expect in Amazon results

Amazon is the largest US e-commerce company. When the group reports the results on April 24, Street will pay attention to the six segments that contribute to revenue:

Online stores (about 50% of revenue) Physical stores (about 6%) Third-party sellers (20%) AWS (12%) Subscriptions such as Amazon Prime (7%) Other, such as credit card agreements and advertising (5%)

In January, the Group reported robust Q4 results that easily exceeded analysts’ expectations. Revenue increased 21% to $ 87.4 billion, compared to $ 72.4 billion in the fourth quarter of 2018. Its earnings per share were $ 6.47, beating consensus estimates of $ 3.98.

At the time, management had also been optimistic about Q1, saying it would likely report revenue of $ 69 billion to $ 73 billion.

As the revenue distribution highlights, investors are likely to pay special attention to results from both e-commerce and AWS.

According to eMarketer, for example, Amazon Prime members in the US have significantly increased their purchases in most product categories between February and April 2020.

The home economy has affected how we live, work, shop and study. And Amazon seems to be able to serve customers in most aspects of this “new lifestyle” either through the products they deliver or the infrastructure that AWS cloud services provide.

At the end of 2019, the Group’s cash and cash equivalents amounted to more than $ 55 billion. For Bezos, the free cash flow over accounting revenues has been crucial since the first days of Amazon. And the company has been generating free cash for almost two decades now. The staggering amount of cash it now has is likely to give management great flexibility in the coming quarters.

Amazon’s Q1 results will be a mirror not only of how the Group’s results are, but also of how our consumption patterns may change as a result of the pandemic.

AMZN’s latest price measure

The Amazon stock‘s 52-week range includes a maximum of $ 2462 in mid-April and a minimum of $ 1626.03 in mid-March. In other words, the shares increased by more than 50% in more than one month. The price is currently around $ 2400.

It cannot be wrong to say that the Amazon stock price in the short term has already discounted most of the good news that Street expects from upcoming Q1 results. Its ratio between price and profit and price sales amounts to 79.1 and 4.2, respectively. Many investors may consider both values ​​to be quite rich.

In terms of technical analysis, the AMZN share is currently overbought. In the coming days, the price will probably be very volatile, especially around the day of earning. As I write, the option markets forecast a movement of 7% in both directions after the Q1 release.

If you already own AMZN shares, you may want to stay the course and keep your position. That said, if you’re worried about further profits, you may want to consider placing a stop loss of around 3% to 5% below the current price point within the parameters of your portfolio allocation and risk / return profile to protect the profit you have already made from Amazon. -shares.

If you are an experienced investor in the options market, you can also consider using a covered call strategy with a time horizon of approximately two months, ie. June 19 expiration. Such a covered conversation position would offer you some disadvantages. You could also participate in a potential mission.

The conclusion of the Amazon stock

From a business perspective, the Covid-19 pandemic has far-reaching effects on employee health, e-commerce, technology, working life, studies, travel, manufacturing and the economy at large. The immediate response that many countries have adopted has been a form of “on-the-spot protection” action. And under lock and key, e-commerce and technology companies, like Amazon, have become the ones millions if not billions of people around the world trust every day.

We can only assume that the company will continue to serve its customers for many years to come while at the same time successfully adapting to changes in business conditions. So it is safe to say that the AMZN stock belongs to a long-term portfolio. However, investors should also remember that a stock‘s price increase is never a straight line.

Investors should be ready to embrace more volatility in the coming weeks. Short-term gains can soon take a toll on Amazon stock. However, those who have a time horizon of two to three years may consider buying in any weaknesses, especially around the result during the first quarter.

Tezcan Gecgil has worked in investment management for over two decades in the United States and the United Kingdom. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) degree. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially likes to cancel weekly calls for income generation. At the time of writing, Tezcan Gecgil had no position in any of the above securities.