How The Bears May Get Their Day With Amazon.Com

| About: Amazon.com, Inc. (AMZN)

Summary

Amazon is expected to show a fat profit and 28% growth when it reports this evening.

A lot of the stock's value is tied to the AWS cloud, which is profitable but where investment has slowed.

With competitors investing billions to catch up, can AWS keep the growth going?

Any weakness in AWS will send the stock south in a hurry.

Amazon.Com (NASDAQ:AMZN) reports earnings after the bell and expectations are absurdly high. Analysts are expecting it to earn $1.11 per share on revenues of over $29.5 billion. The whisper number is for even more earnings $1.31 per share.

That's pretty much on par with the last quarter, but it represents growth of nearly 30% from the previous year's $22.7 billion in revenue, on which the company posted a loss of 12 cents/share.

But not all Amazon dollars are created equal. The bulk of that revenue will come from sales of product. Retail stocks usually trade at a discount to their sales - Costco (NASDAQ:COST) stock sells for about half the company's annual revenue.

What investors will really be looking at, beyond the top line, beyond even the bottom line, is the growth Amazon reports in cloud revenue, in Amazon Web Services. Over the last few quarters, this has been spectacular, and revenue came in at $2.566 billion during the last quarter alone, with margins of about 28%. That would be $10 billion for a full year, with $2.8 billion of profit, and some Amazon bulls value that part of the business alone at $200 billion.

This is going to become a problem. While Amazon has backed off on capex spending this last year, rivals like Microsoft (NASDAQ:MSFT) and especially Apple (NASDAQ:AAPL) have accelerated their spending. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) has targeted cloud rental as a point of emphasis, under Diane Greene. Amazon, in other words, has a giant target on its back. How long can it essentially "milk" the cloud for profit in that environment?

It can't. Can AWS continue its spectacular growth rate, and profitability? How can investors value that cloud revenue at 20 times sales if it can't?

There will be places Amazon bulls can point to if AWS revenues falter a little bit. They may focus on revenues from Prime Video, which can now be bought separately from shipping. They may focus on growth in India, or on Amazon fulfillment, which is something like renting its warehouses and back-end capabilities the way cloud rents computers.

But if the AWS number is light, I don't think that's going to help. It's the old expectations game. Investors didn't expect much from Apple and, when things were better than expected the stock popped. People are expecting a whole lot from Amazon, especially on the AWS front, and if it falters at all the stock is going to plunge.

I currently have 100 shares of Amazon, which didn't seem like a lot when I bought them at about $330 but now represent a hefty chunk of my holdings with the stock at $740. If I had any pressing need for cash I'd hit the cash register, but I'm still looking five years ahead, I'm not a trader, so I'm going to sit tight for now.

But I expect a hard fall, possibly to below $700, and investors may find next week there's a bargain here.

Disclosure: I am/we are long AMZN, GOOGL, AAPL, MSFT, COST.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.