Wedbush expects Amazon’s gross profits to beat estimates, but with expenses rising even faster, when it reports second-quarter results.
Ina Fassbender/AFP via Getty ImagesWith e-commerce activity continuing at levels well above pre-pandemic levels, Amazon.com should blow away current Street sales estimates when it reports second-quarter results next month. Can it do the same at the profit line?
The answer is...eventually. Wedbush analyst Michael Pachter dives into the Amazon story in a research note Wednesday, in which he contends that Amazon (ticker: AMZN) should be able to deliver substantial earnings over the longer term as long it can keep spending growth below revenue growth.
He sees margin growth at Amazon Web Services, Fulfillment by Amazon, and advertising, with Prime “driving overall retail revenue growth.” Near-term profitability, he cautions, “remains difficult to predict.”
Here’s the issue: On one hand, the stay-at-home trends should boost revenues, with particularly strong growth in groceries. But Pachter notes that “after spending billions of dollars to enhance shipping speeds in 2019, Amazon has switched its focus to the well-being of its employees, for which it should be commended.” He points out that Covid-19-related expenses in the March quarter exceeded $600 million; for the second quarter, Amazon has said it could spend $4 billion or more on Covid-related expenses. Pachter expects “ongoing elevated spending” given the pandemic is far from over.
“Unfortunately, infection rates across many regions of the country and the world appear to be ballooning thanks to premature and ill-advised (in our view) attempts to return to normalcy,” he writes. “Spending on safety-related measures is unlikely to slow down any time soon. By doing the right thing in prioritizing the safety of its employees, Amazon will likely spend several billion dollars on safety in future periods that are largely incremental to its forecast from late-April. As a result, the profit flow-through from significantly higher shipping volumes and the accelerated shift towards online purchases due to the pandemic remains unclear.”
Pachter expects gross profits to beat estimates, but with selling, general, and administrative expenses rising even faster. Pachter on Wednesday lifted his price target on Amazon shares to $3,050, from $2,750, “reflecting multi-year potential for top-line upside.” But he’s not changing his estimates for profits or Ebitda (earnings before interest, taxes, depreciation, and amortization).
The analyst adds that “a higher valuation multiple is warranted given ongoing trends that should benefit top-line performance meaningfully over the next several years.”
In a generally softer market, Amazon stock is off 1.1%, at $2,734.95, in recent trading. The S&P 500 is down 2.5%.
Write to Eric J. Savitz at eric.savitz@barrons.com
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Expect Continued Soaring Sales Growth at Amazon. Profits Are Another Story. - Barron's
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