Amazon's Q4 Report Should Show Torrid Growth, Ongoing E-Commerce Dominance

After its record-breaking holiday season, investors aren't expecting to be disappointed when Amazon (NASDAQ:AMZN) reports fourth quarter 2018 earnings later today. The e-commerce giant continues to benefit from robust consumer demand and an ongoing shift from the brick-and-mortar retail model to internet shopping.

AMZN Weekly 2016-2019

At the end of December the world's largest internet retailer announced that “tens of millions of people worldwide” signed up for its Prime service, which offers free two-day shipping on millions of items as well as video and music streaming. In the U.S. alone, more than 1 billion items were shipped for free using Prime, Amazon said in its statement.

These favorable conditions are enough for the company to post another strong quarter at a time when other big tech companies are struggling to continue their sales growth, hurt mainly by slowing demand in China.

Analysts, on average, expect Amazon to post $5.67 a share profit, more than double what it made a year ago. Sales should surge 19% to $71.87 billion. According to researchers at eMarketer, Amazon is likely to finish 2018 having cleared $258.22 billion in U.S. retail sales. That would represent 49.1% of all online retail spending in the country.

This strength is what's driving the rebound of Amazon's stock after its December dip. Since December 23, AMZN shares have been the second best performer among the group of big tech companies known as the FAANGs, gaining more than 20%, putting it right behind Netflix (NASDAQ:NFLX).

2 Risks To Torrid Growth

If you're a long-term investor, there's no good reason not to own Amazon shares. Its dominance in the e-commerce space remains unchallenged, while the company's deep pockets are enabling it to grow in other areas of the digital economy as it disrupts additional industries.

That growth momentum, however, could slow if we see the U.S. economy take a hit from a prolonged trade war with China, and both consumers and companies stop spending the way they've been during the past decade.

Amazon’s third quarter earnings report took many investors by surprise as growth in its core business, selling merchandise online, slowed quarter-over-quarter for a fourth consecutive period. That deceleration made many wonder whether the company is reaching a saturation point.

In our view, Amazon’s first quarter guidance will be the key to its shares’ ongoing momentum. If the company doesn’t see a big threat in the near-term to its bread-and-butter e-commerce business, that should a positive signal for investors who want to take advantage of the nearly 18% plunge in shares—which closed yesterday at $1,689.70—since the stock reached a record high of $2,050.50 in September.

The other area of concern for Amazon investors should be the intensifying rivalry in the cloud computing business, which is becoming one of the fastest growing segments for the company. For the trailing nine-month period ending September 30, Amazon’s web services business (AWS) brought in $5.1 billion in operating income, contributing 73% to the company’s consolidated income.

That segment of the digital economy is, however, becoming increasingly competitive with other major tech players, including Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) also trying to grab the biggest share. In the latest quarter, Microsoft commercial cloud sales rose 47% to $8.5 billion, while margins for that business widened by 4 percentage points to 62%.

Bottom Line

Because of Amazon’s premier position in many of the areas in which it operates, its stock is one of the safest bets in the tech sector. If its e-commerce business continues to show a blistering growth trajectory and its earnings momentum from AWS remains strong, we should see the price of shares surge. For buy-and-hold investors, Amazon is particularly attractive after losing nearly a quarter of its value over the past months.