Amazon Q3 Earnings: Strong Sales Growth Could Power Stock Rally

Investors in the e-commerce powerhouse Amazon.com Inc (NASDAQ:AMZN) have all the reasons to feel excited these days. The company’s sales are surging as the global COVID-19 pandemic continues to flare, forcing people to stay at home and make more and more purchases online.

That strength will be on display when the Seattle-based company reports its third-quarter earnings. The release will likely show sales growth of 32% when compared with the same period a year ago.

Expectations of explosive growth have fuelled a massive rally in Amazon shares, which surged 73% this year. The stock closed yesterday at $3,286.33, up 2.47% on the day.

One of Amazon’s biggest strengths: its paid membership program. This program is the largest in the world, boasting more than 150 million paid members today.

In exchange for an annual fee, its Prime membership offers free, expedited shipping on a variety of items. Members also benefit from streaming movies, TV shows and music, as well as members-only deals.

Over time, the program has helped entice customers who once might have only used Amazon for books and movies. 

Investors are confident that the consumer habits brought about by the coronavirus will stick, creating more opportunities for Amazon. The e-commerce juggernaut has added more than $700 billion to its market value since its March lows, or about the size of Facebook (NASDAQ:FB). Its market capitalization now exceeds $1.6 trillion.

Cloud Strength

Though Amazon’s online marketplaces generate most of the company's revenue, that's not the most profitable segment. Amazon is also the world’s largest cloud infrastructure provider, with Amazon Web Services (AWS) generating the largest share of the profit.

Because AWS is a high-margin business, it provides Amazon with cash funding to expand its business strategies, including aggressive promotions and cheap hardware devices.

The unit posted a 29% growth in Q2, a 33% surge in sales during Q1 and will likely show another strong performance as companies shift their data to servers provided by Amazon.

However, along with these highly favorable growth conditions, Amazon's costs are also increasing. As the pandemic rages on, Amazon is spending billions of dollars on safety, hiring workers, increasing pay, improving delivery times, conducting medical tests for employees and stabilizing its supply chain.

Escalating costs, however, shouldn’t concern the company’s long-term investors. The founder and CEO Jeff Bezos has had a good track record of producing results by investing in new data centers and warehouses to extend its e-commerce capacity.

These bets have paid off big-time in the past, reinforcing the company’s wide competitive advantage in e-commerce.

New Growth Ventures

Aside from the tight-margin businesses selling goods online, Bezos is investing in new high-margin expansion arenas including digital advertising, which is rising at a triple-digit rate.  

Backed by these extremely profitable units, Amazon has been able to disrupt an array of industries will continue to do so for a long time.

Other growth ventures: the Amazon Studios division is starting to pose a challenge to Netflix (NASDAQ:NFLX) and HBO (NYSE:T) with its original movies and television shows. Amazon also has its foot in the brick and mortar space, after acquiring grocery purveyor Whole Foods Market in 2017, the company is building a fleet of cashier-less convenience stores.

Amazon's hardware unit, also affirms the company's competitive advantage as it produces smart speakers and video streaming gadgets.  

Bottom Line

Given Amazon's robust business, all 36 major analysts now have a buy rating on Amazon, according to TipRanks.com. Bernstein—the final major investment firm with a hold rating— upgraded the stock in September, citing the recent pullback as an opportunity to long the shares after missing the comeback since March.

Any temporary setback can be seen as an opportunity for long-term investors to buy Amazon stock.