Amazon Q4 Earnings: Rising Costs May Hurt Profits, But Stock Still A Solid Buy 

When e-commerce powerhouse Amazon.com (NASDAQ:AMZN) reports its fourth quarter earnings later today, investor focus will be on the company’s rising costs which have put pressure on earnings despite swelling sales.

Since the outbreak of COVID-19 in March of last year, Amazon’s sales are surging as people, staying at home, continue to make more and more purchases online. This overwhelming demand is also responsible for pushing Amazon’s costs higher as the company invests in new warehouses and expands its delivery capabilities.

As the pandemic rages on, Amazon is spending billions of dollars on employee safety as well as hiring additional workers, increasing pay, improving delivery times, conducting medical tests for employees and stabilizing its supply chain. The Seattle-based e-commerce behemoth reported in October that it now employs more than one million workers, with 1,125,300 full- and part-time workers at the end of the quarter, up 50% from a year ago.

AMZN Weekly TTM

While its sales are expected to hae seen a steep jump during the holiday quarter that ended on Dec. 31, some adjustments to its operations and greater spending due to COVID-19 would continue to weigh on its profitability. 

That’s perhaps the main reason that Amazon shares—after reaching an all-time closing high of $3531.45 in early September—haven't done much for shareholders since then. They closed on Friday at 3,206.20, up about 6% during the past three months.

Growing Cloud Business 

Notwithstanding the cost pressures, however, the company’s ever-growing cloud computing segment could still crush expectations. Amazon is the world’s largest cloud infrastructure provider, with Amazon Web Services (AWS) generating the largest share of the company's 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 division produced 29% growth in both Q3 and Q2, a 33% surge during Q1 as companies continue to shift their data to servers provided by Amazon.

Escalating costs, however, shouldn’t concern the company’s long-term investors. Founder and CEO Jeff Bezos has had a good track record of providing a conservative guidance and then exceeding expectations. 

That’s the reason the majority of analysts who watch the stock have a buy rating on it, with the 12-month price target of $3,831.77, a potential 16% jump from the current level. 

Bottom Line

Even after gaining more than 65% during the past 12 months, Amazon continues to be a solid pick for long-term investors. The factors that fueled the 2020 rally are still in play, given still-low e-commerce penetration, expanded fulfillment capacity, and the shift toward cloud computing.