Amazon (AMZN -0.95%) stock outperformed a rallying market in 2020 as the business benefited from huge changes in spending habits by consumers and tech companies. But that surging stock price sets a high bar for its upcoming fourth-quarter earnings report that covers the critical holiday shopping season.
With that backdrop in mind, let's take a closer look at what investors can expect to hear from the tech giant on Tuesday, Feb. 2. Here are three trends to pay attention to when the report is released.
1. Handling the volume spike
All signs are pointing to a blockbuster sales result given the intense focus on e-commerce over the holidays. Amazon added a whopping $35 billion, or 32%, to its annual product sales base through the first three quarters of the year. The services segment experienced an even higher percentage increase thanks to booming demand for its hosting platform.
CEO Jeff Bezos and his team in late October issued a wide range of short-term sales forecasts that would put revenue between $112 billion and $121 billion in the fourth quarter, translating into growth of between 28% and 38%. Wall Street is betting on the high side of that range, with most investors looking to see growth of about 37% in this report. Besides the core demand trend, it will be interesting to see how Amazon handled unprecedented sales and fulfillment volumes, and whether that spike pressured customer satisfaction by delaying deliveries, for example.
2. Profit outlook
The Q4 outlook is even cloudier when it comes to profit. Amazon is projected to spend as much as $4 billion on extra costs related to COVID-19. Those expenses are sure to pressure earnings, but ideally, the e-tailer's core profitability will hold up. Operating margin landed at 6.4% of sales last quarter compared to 4.5% a year earlier and a similar boost would power impressive earnings growth in Q4.
Still, management issued another cautious outlook on this score. Due to those pandemic-related costs, operating income could land anywhere between $1 billion and $4.5 billion this quarter, compared to $3.9 billion in 2019's holiday period.
3. The start of a new year
Plenty of attention will be focused on Amazon's momentum through the start of 2021, and what that might say about the tech giant's potential to improve on the past year's record performance. Heading into the report, most investors who follow the stock are looking to see sales gains slow (down to 18% in 2021 compared to the expected 35% in 2020) while still showing market share growth for this dominant business.
If Bezos and his team disappoint Wall Street, the frustration is likely to be around profits. Following a massive sales year, Amazon will have no shortage of growth initiatives it can invest in to protect its market lead even as COVID-19 costs continue into late 2021.
Fending off new e-commerce rivals and building a stronger fulfillment network will require resources, which might pressure earnings and cash flow in 2021. Yet the company has demonstrated many times in the past decade that an aggressive approach to growth is the best way to maintain and extend Amazon's lead through a wide range of selling conditions.