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Amazon's holiday season and Q4 prospects appear bright – analysts

Amazon.com Inc. is bolstering its shipping efforts and growing engagement among its Prime members as the company heads into the holiday season and targets home-bound shoppers amid the coronavirus.

Those moves — along with an unusually late Prime Day sales event in October — put the company in pole position to deliver strong fourth-quarter figures, according to analysts. This comes just after Amazon's third-quarter profits and sales blew past market expectations.

Analysts are expecting the company's fourth-quarter revenue to grow nearly 37% year over year to $119.45 billion, on the higher end of Amazon's own projected range, according to S&P Capital IQ. Similarly, analysts are bullish on operating profit. They expect the company to post a fourth-quarter EBIT of $4.55 billion, which is also on the upper end of the company's forecasts. Amazon has said it anticipates a potential dip in fourth-quarter operating income on COVID-19-related expenses, predicting it to come in between $1 billion and $4.5 billion.

"I think it's going to be a historically strong quarter for Amazon," said Andrew Lipsman, principal analyst with eMarketer, in an interview. "Based on what happened in Q3, I am only more convinced. It was much stronger than expected, and that was without the benefit of Prime Day."

Amazon is expected to report its fourth-quarter numbers in January.

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Amazon expects to incur $4 billion in coronavirus costs during the fourth quarter.
Source: Amazon

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Maintaining momentum

The fourth quarter is critical to retailers like Amazon as consumers focus on gift-giving around the holidays. But this year, Amazon's performance in the quarter is likely to be even better than usual as the company benefits from an uptick in online shopping spurred on by the coronavirus, experts say.

The company is likely to see a fourth-quarter boost from its 48-hour online Prime Day on Oct. 13-14, a "pull forward" of sales that otherwise would have occurred in July during the third quarter, said Morningstar analyst R.J. Hottovy.

Amazon's CFO Brian Olsavsky did not disclose specific figures, but said during a third-quarter conference call that the Prime Day event was "strong." The company did say that its third-party sellers, which make up the majority of sales on Amazon's site, surpassed $3.5 billion in sales during Prime Day, a nearly 60% increase year over year.

Increased engagement among Amazon Prime members will also likely factor into fourth-quarter sales as members expand usage of services such as Prime Video, Hottovy said. Subscription services, which includes revenue from Prime members, grew to $6.57 billion in the third quarter, up 32% from $4.96 billion in the year-ago quarter. "I think it's a given that they'll see pretty big sales numbers," Hottovy said. "Amazon has obviously been even more of a vital channel of distribution for consumers."

Olsavsky noted in the third-quarter call that Prime members "continue to shop with greater frequency and across more categories than before the pandemic began."

Amazon's plans to accelerate its fulfillment and network square footage by 50% by the end of 2020 will behoove the company's ability to deliver packages during a holiday season when many state governments are advising against in-person gatherings, analysts said.

"We are encouraged by leverage seen in fulfillment centers and Amazon Logistics despite Covid-19 impact, and we believe this increase in capacity should position Amazon for long-term growth," said Ed Yruma, managing director and equity research analyst with KeyBanc Capital Markets, in an Oct. 29 note.

Meanwhile, Amazon's revenue from advertising grew in the third quarter and will likely continue to increase in the fourth quarter, Lipsman said.

The company's "other" category that includes advertising services grew to $5.40 billion, up 50% from $3.59 billion in the year-ago quarter.

Mark Shmulik, a vice president and senior analyst with AB Bernstein, said Amazon is still relatively new to the advertising business but has seen ad revenue grow as consumers increasingly search for products on Amazon's site during the pandemic. Companies can buy sponsored ads that appear in search results, thus increasing visibility for their brands. Amazon is also actively selling video ads to engage audiences across its video channel and Amazon Fire TV devices, he said.

"To me, that's a business that's really about to hit its stride," he said.

Great expectations

Amazon is now in a quarter where analysts expect the company to bring in $119.45 billion worth of revenue, up nearly 37% from $87.44 billion in the fourth quarter of 2019. That is on the higher end of the company's own projection that fourth quarter sales will range between $112 billion and $121 billion, representing growth of between 28% and 38% compared with the fourth quarter of 2019.

Analysts now expect Amazon's total revenue for 2020 to grow 35% to $379.87 billion from $280.52 billion in 2019.

The e-commerce company warned that it expects to incur $4 billion in coronavirus-related costs during the fourth quarter that could translate into a dip in operating profit. The costs encompass measures including cleaning, testing and social distancing efforts.

Shmulik said he is not particularly concerned about the pandemic-related expenses. Amazon also incurred $4 billion in coronavirus costs in the second quarter, and "we really haven't seen operating income take a hit," he said.

If Amazon's fourth-quarter revenue lands on the high end of its range "then you can imagine they will be on the higher end of their net income range as well if not a bit higher," Shmulik said.

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Shipping headwinds

However, potential shipping challenges during the holiday season could inhibit growth for Amazon even as the company works to increase capacity and protect front-line workers, experts say.

James Thomson, a former Amazon executive and partner with Buy Box Experts, said there will be times when the entire shipping industry, including Amazon, will be constrained. "The whole logistics system just hasn't grown fast enough to keep up with demand," he said in an interview. "At the end of the day, you can only push so many packages through the pipe."

Even so, Amazon is "better positioned to beat their earnings than anybody else," largely due to its ability to guarantee fast delivery for last-minute orders during the last two weeks before Christmas, Thomson said. That is an advantage Amazon has over companies like United Parcel Service Inc., which is not able to guarantee that ground-shipping deliveries will arrive by Dec. 24 if shipped after mid-December, he said.

"They are going to be in a much better position to make that promise, that yes, you can buy on Dec. 20 and we can still get it to you on the 24th," Thomson said. "Yes maybe you can do curbside pickup the day before Christmas, but curbside pickup only gets you so far in Q4 when you're trying to gift to other people who you are not going to be spending physical time with. So I need somebody to actually ship it to someone else. I need Amazon more than ever the 10 days before Christmas."