Amazon is set to unveil its third-quarter financial results on Thursday after the market close. This earnings announcement will be eyed closely as it will shed light on the post-lockdown period, allowing investors to monitor how well Amazon can measure up to a tough year-ago comparison when revenue was surging due to Covid-19 restrictions. Although deterioration in the company’s growth figures is expected, the consensus recommendation from Refinitiv analysts is ‘buy’, indicating strong growth prospects for the firm.

Can Amazon adapt to maintain its pandemic gains?

Amazon experienced exponential growth in 2020 with pandemic-driven tailwinds pushing it forward, turbocharging both its revenue and earnings. However, this year has turned out to be much more of a challenge on several levels, resulting in the stock’s underperformance. Especially in Q3, the e-commerce leader is facing tough year-on-year comparisons as the pandemic was raging in the same quarter last year, forcing consumers to heavily rely on online shopping.

The company has launched many new services and features to remain profitable, hold onto its Covid-19 gains, and ultimately keep its shareholders happy. Amazon bases its post-pandemic growth on the success of its recently launched streaming and music services, while it has already become one of the leaders in the cloud computing industry. Furthermore, the firm has announced even more optimistic plans such as to expand in the airline sector or to even launch a standalone global delivery business.

Supply bottlenecks and employee shortages the biggest threats

Currently, Amazon is struggling to deliver packages as efficiently as consumers were used to due to the lack of drivers and shipping containers stuck in ports. Late deliveries could lead to the termination of subscriptions by unsatisfied customers, which would essentially damage the firm’s reputation and earnings. In order to partially offset these issues, the e-commerce giant has tried to attract new employees by constantly improving working conditions and hiking wages. In turn, these policies could increase operational costs and severely affect the firm’s profit margins.

Slowdown on revenue growth; EPS plummets

Amazon’s financials are expected to reflect a loss of momentum due to the global reopening of economies. The online retail behemoth is expected to post revenue of $111.56 billion for the third quarter according to consensus estimates by Refinitiv IBES, which would represent a year-on-year growth of 16.03%. However, this figure indicates a deceleration in Amazon’s growth as it is the smallest annual increase in the last 4 years. Earnings per share (EPS) are estimated to tumble to $8.91, representing a 27.95% decrease on an annual basis. Net income is forecast to decline by 26.97% to $4.623 billion.

Valuation remains ‘expensive’

Although Amazon has realized huge gains after the Covid-19 pandemic outbreak, the company remains overvalued with a trailing 12-month price to earnings (P/E) ratio of 58.1 (as of October 22, 2021), which is substantially higher than the retail sector’s average of 12.8. Moreover, its forward 12-month P/E ratio is currently at 51.8, with most of its major competitors reporting a significantly lower figure. However, the aforementioned indications suggest that markets are factoring in the ability of the company to successfully expand its services, pricing in strong growth for Amazon.

Levels to watch

Taking a technical look at Amazon, a negative outlook can be observed as the share price has been trending downwards after achieving a record high of 3,773 in mid-July. However, the short-term picture seems neutral, with the price fluctuating near its 50- and 200-day simple moving averages (SMAs), indicating that a strong signal is required for the price to adopt a clear direction. This will probably be given in the upcoming earnings announcement.

If earnings disappoint, initial support may be found near the $3,175 region, where a violation would turn the focus towards the $3,000 psychological mark. On the other hand, stronger-than-expected results coupled with strong Q4 guidance could propel the stock above its SMAs and target the $3,462 barricade. If buying interest intensifies further, then the next obstacle could be met at $3,550.

Overall, analysts are holding on to their bullish views of Amazon stock, even though it appears to be losing steam ahead of the Q3 print. The $4,145 median target price set by Refinitiv’s analysts would constitute a new all-time high, which is a clear indication that the firm’s growth prospects seem bright.