How Did The Pandemic Impact Amazon's Retail And Cloud Services?

Amazon Inc AMZN celebrated its 25th anniversary earlier this month. But the way the company grows and innovates—not to mention how its stock price moves—you’d think it’s a young startup.

In his most recent letter to shareholders, AMZN CEO Jeff Bezos stated that if the pandemic taught the company one thing, it was how to operate under chaos. When most of the world was sheltering at home, AMZN was busy getting necessary supplies delivered to customers’ doorsteps. This unexpected surge in demand came with its challenges, especially in supply chains and operations networks. During the early stages of the pandemic, AMZN had to quickly take steps to prioritize the delivery of essential services.

Bezos also stated that Amazon Web Services (AWS) played a role during the pandemic. He stressed the importance for organizations to have access to dependable and secure computing power especially when it comes to health care, online learning, and remote work environments.

What Should Investors Listen For?

With online shopping and demand for cloud services—AMZN’s bread and butter—surging during the pandemic, investors could be optimistic about the company’s earnings. Will AMZN’s leadership in both these spaces come through when the company reports Q2 earnings on July 30?

After a Goldman Sachs Group Inc GS analyst raised AMZN’s target price to $3,800, shares rose nearly 8% but didn’t quite reach the all-time high of $3,344. It’s a closely watched stock—part of the “FAMGA” tech giants—and investors are likely to keep an ear open for indications of AMZN’s future plans. The company has made acquisitions and partnered with different types of industries, from self-driving vehicles to health care to fintech companies in an attempt to spread its global reach.

FIGURE 1: AMZN RALLIES WITH FELLOW FANGS. A surge in demand for online shopping and cloud services has helped fuel a rally in Amazon (AMZN—candlestick) shares. The same can be said of the overall FANG+ Index ($NYFANG—purple line) especially as cloud migration accelerates across different industries. Data sources: Nasdaq, ICE Data Services. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

In Q1, AMZN’s sales rose 26% year over year, mainly due to an increase in online orders that resulted from shoppers staying at home. During the early stages of the pandemic, many were ordering essentials such as toilet paper, disinfectants, and non-perishable food items. But demand continued to rise as online ordering became more of the norm, and in April, AMZN announced it would hire additional staff and lease more cargo aircraft.

But it has also faced some shortcomings, especially when it came to ensuring safety of its employees. Since most Amazonians—as its employees are referred to—provide “essential services” they’ll need to show up for work to stock, ship, and deliver. With soaring demand in the early stages of the pandemic, AMZN may have struggled to meet the necessary safety conditions. This brought about some scrutiny about how AMZN was handling safety measures for their employees.

According to Bezos, AMZN is responding to COVID-19, and could end up spending over $4 billion to implement safety measures for its employees and customers. This includes making process changes in its operations network and Whole Foods Market stores, implementing sanitizing measures, checking temperatures, and providing in-house testing abilities. AMZN also prioritized the delivery of essential goods and medical supplies. This move may have hurt the company’s earnings to some extent, since essentials are generally lower-margin items.

So even though AMZN might post strong sales, could revenues be enough to make up for the additional expenses?

Remember: Last quarter, AMZN revenues came in higher than expected but profits were lower. During its Q1 earnings call, the company stated it would reinvest Q2 profits into its operations. Bezos reiterated that under normal circumstances, AMZN expects to make some $4 billion or more in operating profits. But circumstances aren’t normal, so expenses could be a key factor to listen for during the earnings call.

What’s In Your Shopping Cart?

During the pandemic, AMZN’s role has expanded beyond ordering essential supplies. Its customers depend on it for ordering just about everything online. But when shops start reopening and things start returning to normal, are customers likely to make online shopping a part of their lives or will they spend less time ordering items online?

It could go either way and retailers like Target Corporation TGT and Walmart Inc WMT don’t want to miss out on the e-commerce trend. WMT is offering its customers Walmart +, a membership similar to Amazon Prime. E-commerce requires sophisticated logistics and infrastructure and to have one similar to that of AMZN can be an expensive venture. Retailers who may not have the sophisticated order fulfillment infrastructure are coming up with creative methods to develop more efficient processes using their network of physical stores. Since customers are getting used to quick delivery times, it’ll be interesting to see how retailers who jump on to the e-commerce trend meet customer demands.

AMZN builds customer loyalty through Prime subscriptions and Alexa, its voice assistant. Another thing to note heading into earnings is if AMZN gives any indication of an increase in Prime memberships during the pandemic. And of note: AMZN’s Prime Day is still on the calendar. It won’t be in July due to supply chain disruptions and transportation slowdowns, but it’s likely to happen later this year.

Meanwhile Up In The Cloud …

AWS, AMZN’s cloud computing arm, plays a significant role in earnings. Last quarter, AWS sales rose 33% year over year and revenue came in at $10.22 billion. This may have been less than analyst expectations, but it’s about 13.5% of AMZN’s total revenue.

And let’s not forget, as enterprise customers accelerate their migration to the cloud, AWS faces tremendous competition from companies such as Microsoft Corporation MSFT and Alphabet Inc Class A GOOGL who both have a piece of the cloud pie. According to a CNBC report, last quarter AWS was still leading in market share in the cloud computing space even though its lead may be narrowing.

With more people working remotely, companies are scrambling to make remote work efficient and secure. At a virtual summit earlier this year, AWS CEO Andy Jassy mentioned that significant efforts are being made to help organizations maintain operations and shift employees to working from home.

During the pandemic, many companies, including those in the enterprise and public sector, have leveraged the cloud to scale up their services. AWS provides web services to a very diverse customer base which includes just about every vertical business segment—health care, financial services, energy, government agencies, educational institutions, non-profits.

In this highly competitive environment, AWS continues to take steps to attract a broader customer base. In June, AWS announced Honeycode, a service that non-coders can use to create apps. This potentially opens the door for more customers to adopt AWS.

Innovation: It Keeps AMZN “Young”

To keep in line with their innovative culture, AMZN continues to acquire companies to diversify into different industries. There’s the recent acquisition of self-driving startup Zoox for $1.2 billion. That’s a lot of cash and gives a glimpse into what AMZN sees in its future. Does AMZN want to compete in the robo-taxi space or have a fleet of self-driving delivery vehicles?

AMZN is also moving into the financial services arena. Since March, AMZN has made investments in international fintech companies, especially India. Earlier this year, Bezos announced that AMZN wants to have a larger presence in the nation and is likely to invest around $1 bn to digitally transform small- and medium-sized businesses. These are additional expenses to keep in mind as we head into the earnings call.

AMZN Earnings And Options Activity

When AMZN reports earnings on Thursday, it’s expected to report adjusted EPS of $1.45, down from $5.22 in the prior-year quarter, according to third-party consensus analyst estimates. Revenue is projected at $81.31 billion, up 28.2% from a year ago.

Options traders have priced in a 5.8% stock move in either direction around the coming earnings release, according to the Market Maker Move™ indicator on the thinkorswim® platform.

Looking at the July 31 weekly expiration, option volume has been pretty much spread out but to the downside there have been concentrations at the 2900 and 3000 put strikes. To the upside, the highest volume has been in the 3100 and 3200 calls. Implied volatility was at the 59th percentile as of Monday afternoon.

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.

Cover photo by Getty Images.