Locked Down, Demand Up: Amazon Shines As Virus Economy Plays To Its Strengths

Amazon.com, Inc. AMZN has weathered some fierce economic storms—the dot-com selloff two decades ago, the financial crisis of 2008-09, and the European debt debacle. Now, signs are pointing to the online retail and cloud computing behemoth holding up well during the economic downturn sparked by the coronavirus.

While we won’t know the exact numbers until the company opens its books on Thursday afternoon, Amazon has been on a massive hiring spree, even as many other companies are furloughing workers or laying them off. And although overall retail sales in March posted the biggest drop since data started being collected, grocery stores and e-commerce have shown strength. That’s likely to be good news for Amazon as the company has been pushing into online grocery sales. And, of course, the company has been a leader in general e-commerce for some time now.

Basically, the economic situation caused by the pandemic plays to Amazon’s strengths in e-commerce, including grocery delivery, cloud services, and entertainment streaming. The company’s momentum was already good before the pandemic; now it seems to be accelerating.

“The signs that Amazon is getting crushed with demand were there at the outset of the health crisis, with delayed delivery of orders, limited availability of delivery slots for Prime Now, inventory breakage, as well as the two separate announcements that amounted to incremental (roughly) 175k personnel to facilitate fulfillment,” Credit Suisse analysts wrote in a note.

Cloud Services and Streaming

Amid the bump in demand as people stay at home, investors are likely to be closely monitoring details on Amazon Web Services (AWS), a business of AMZN’s that seems tailor-made for the internet-centric work-and-play-at-home economy. And Amazon’s Prime Video business caters to people wanting to binge watch shows while they can’t go out for other types of entertainment.

Investors will likely want to see whether the number of Prime subscriptions—which includes Prime Video—has increased. It’s not guaranteed that Amazon will release those numbers, but in January it said it had more than 150 million paid Prime members globally. It might be of particular interest to see how the company views Prime Video as a revenue driver, and thus worthy of additional investment in original content as it battles with streaming giants Netflix, Inc. NFLX and The Walt Disney Company DIS Disney+.

In January, AMZN reported solid earnings that helped move the stock back above $2,000 for the first time since late July. Since then the stock moved higher before the coronavirus put a dent in the share price during the broad market selloff in February and March, when uncertainty about the virus was high. After that, shares have more than bounced with the rest of the market. But since the selloff, AMZN hit a record high above $2,460 earlier this month (see chart below).

FIGURE 1: AMAZ’N RALLY. Not too many companies can say they blew through all-time highs after the coronavirus selloff—but moving business and commercial activity from offices and stores to homes played to the strengths of cloud and e-commerce giant Amazon (AMZN—candlestick). It was even a standout among its fellow FANG+ Index ($NYFANG—purple line) members, which as a whole were hit hard in the selloff but came raging back in late March and April. Data sources: ICE Data Services, Nasdaq. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Analysts Generally More Bullish

Ahead of this week’s earnings release, a steady drumbeat of analysts have been raising their price targets for AMZN. As of Tuesday afternoon, a consensus price target among 47 Wall Street analysts was $2,426.33, well up from $2,204.98 three months prior, according to information provider MarketBeat.

In a note raising its target price for the stock to $2,800 from $2,400, Credit Suisse said the pandemic likely has spurred faster adoption for some retail categories that have been slow to take off via e-commerce. “Food/groceries remain the biggest pool of offline dollars left for online adoption, and (roughly) 7 years after broadly launching Amazon Fresh, we believe this is the company’s moment to accelerate shareholder value creation as consumers who were on the fence on ordering groceries via Prime Now and/or Amazon Fresh should develop a higher comfort level if not an outright purchasing habit,” the analysts noted.

A question, however, is whether Amazon can keep this momentum going when things get back to normal—or whatever qualifies as “normal” post-coronavirus . It could make for some challenging comparable quarters in the future. At some point, people are going to be able to go back out and shop, and despite the general decline in brick-and-mortar retail, there could be some pent-up demand for traditional shopping after people have been cooped up for so long.

Another thing investors are likely to want to hear about when AMZN reports is how much the company is spending to cater to the rising consumer e-commerce demand during the pandemic. Hiring more than 100,000 workers doesn’t come cheap, though at the end of 2019 the company held some $55 billion in cash.

Watching the Clouds

And let's not forget about the cloud race. In previous quarters, the cloud battle between AWS, its chief rival Microsoft Corporation MSFT Azure, and other cloud bigwigs such as IBM IBM and Oracle Corporation ORCL has driven AMZN's growth narrative, with AMZN's flagship e-commerce division viewed by many as the stable-but-steadily-growing cash cow. This time around, AWS might have a bit of that "hey, what about me?" feeling, as COVID-19 shifted the focus back to e-commerce.

But the cloud race hasn’t gone anywhere. In fact, in some ways the shift to a work-from-home environment has bolstered the need for cloud solutions. There’s one thing to look out for, however: The economy. If we are indeed headed for a recession, how might that affect companies’ infrastructure spending plans? If the conversation during Thursday’s conference call shifts to the cloud, investors might want to listen in for insight on how an economic pullback might impact AWS clients’ spending plans.

Amazon Earnings and Options Activity

When results are released Thursday afternoon, Amazon is expected to report adjusted EPS of $6.25, down from $7.09 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $73.6 billion, up 23% versus a year ago.

Looking at the May 1 options expiration, the options market has priced in an expected share price move of 5.2% in either direction around the earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Call activity has been higher at the 2500 and 2600 strikes, while puts have been active at the 2200 and 2250 strikes. The implied volatility sits at the 52nd percentile as of Wednesday morning.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

TD Ameritrade^® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.