Amazon Beats Earnings Estimates & Coronavirus Threat Grows

Coronavirus Deemed Global Health Emergency

WHO stated the coronavirus is a global health emergency. Sure enough, stocks rallied on Thursday just like the historical charts suggested would happen. U.S. stock market investors see this issue as a short-term one-time event. The coronavirus likely won’t have a major impact on America. JETS airline ETF rose 0.72% on Thursday as it began to recover. That being said, other markets have responded more negatively to the recent news.

As you can see from the chart below, oil, copper, and emerging market stocks have fallen. Oil had been falling beforehand. But it’s decline accelerated after the first death from this virus. Oil went from rallying because of geopolitical reasons to falling because of this. 

These outside factors were difficult to predict if you were just focused on the economic cycle upturn at the start of the year. Specifically, the Vanguard Emerging Markets Stock index fell 1.35% on Thursday and has fallen 6.84% since January 17th. Similarly, the CRB commodities ETF is down 7.77% year to date. This is bringing down inflation expectations which is helping to push treasury yields lower.

Unfortunately, coronavirus cases and deaths are still on the rise. The charts below compare this virus with SARS and the 2009 swine flu. As of Thursday afternoon, there were 9,171 confirmed cases worldwide and 7,711 Chinese cases. There were 213 deaths which was up from 130 the day before. There are over 12,000 suspected cases and 1,476 people in serious or critical condition. This virus is shutting down parts of the Chinese economy which is why some estimates expect China’s Q1 GDP growth rate to be dragged down to 4.5%. 

China just announced its manufacturing PMI was 50 which was down 0.2 from December. The survey was conducted before January 20th, so it wasn’t impacted by the coronavirus. We will need to wait a couple more weeks to get a glimpse of how this is hurting its economy. Baltic Dry index, which measures commodity shipping costs, has fallen 10 straight days and is at the lowest level since April 2016.

Stocks Erase Losses

Even though the coronavirus hasn’t been stymied yet, the U.S. stock market recovered miraculously on Thursday. S&P 500 increased 1.21% from its low in the morning to close up 0.31%. Tesla and Microsoft rallied 10.3% and 2.82% on their great earnings reports. Facebook fell 6.05% after reporting disappointing results. 

Altria stock fell 4.23% as the firm disclosed it recorded a $4.1 billion impairment charge related to its investment in Juul. This was because of pending legal charges. The timing of Altria’s stake in Juul was so bad and at such a high price some posit the company did this on purpose to lower competition with its products. That’s obviously not the case. But it shows even a company with solid fundamentals can be hurt by poor management decisions.

With the help of Microsoft, the Nasdaq rose 0.26%. Russell 2000 underperformed as it fell 6 basis points. Many thought the index would hit a new record high if long bond yields rose. They obviously haven’t as the 10 year yield is only at 1.58%. 

The yield curve has flattened as the 2 year yield is just 17 basis points lower. This curve isn’t calling for a recession, but it is calling for another rate cut this year. I’m changing my prediction from no action to one cut in the 2nd half of the year. Fed won’t act in March, but it might forecast a cut later in 2020.

Tech sector was helped by Microsoft and Facebook hurt the communication services sector. They rose by 0.88% and fell 0.79%. Consumer staples sector rose 1.05% despite Altria’s decline. Financials differed from the small cap index as they rallied 1.25%. 

Finally, healthcare was the 2nd worst performer as it fell 0.78%. IHF healthcare insurance ETF fell 1.14% on Bernie’s rise in the polls. Personally, I think he has the best chance to win now. A California poll showed him ahead by a whopping 14 points. Biden was ahead by 7% in Pennsylvania, but that was down from 12% in October.

Amazon Reports Great Earnings

Amazon Web Services is losing some market share to Azure, but it is still growing briskly. Amazon is taking gobs of market share from retailers as it dominates online retail. The firm reported $6.47 in EPS which beat estimates for $4.03 by a mile. 

As you can see from the chart below, revenue was $87.44 billion which beat estimates for $86.02 billion. That was 21% yearly growth. Net income was up 8% after falling 23% last quarter because of its investment in one day delivery. Worldwide shipping costs were up 43% to $12.9 billion.

AWS had $9.95 billion in sales which beat estimates for $9.81 billion. Sales growth was 34% which fell 1% from last quarter. AWS operating income growth was 19% as it reached $2.6 billion which beat estimates by $150 million. 

There are now 150 million paid Prime members. That’s 50 million higher than where it said the total was in April 2018. And that’s 50% growth in 7 quarters. Prime membership fees, Music Unlimited, and Prime Video Channels had revenue growth of 32%. Music Unlimited subscribers were up 50%.

The firm gave strong guidance as it expects Q1 revenue to be in between $69 billion and $73 billion. These results all helped its stock rise 9.75% after hours. It’s the 4th company to be valued above $1 trillion. 

Its stock will likely hit a new record high on Friday for the first time since August 2018 which ironically is when the Russell 2000 also topped. The firm’s “other” category which is its advertising business generated $4.8 billion in sales which was a 41% increase from last year. This is the next growth engine for the firm as AWS transitions into a cash cow in the next couple years.

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1 Comment

  • Kevin Morgan

    February 3, 2020

    250,000 to 500,000 people die of the flu EVERY YEAR. Just sayin'...