Amazon said it would spend all $4 billion of its Q2 profits on COVID-19 responses. Wall Street still expects a profitable quarter. (AMZN)

Jeff Bezos

Amazon reports its second-quarter earnings on Thursday.
Wall Street expects Amazon to report a profitable quarter, even though the company warned it would spend all of the $4 billion in expected operating profit in COVID-19-related initiatives.
The bullish forecast is backed by strong sales growth and the continued expansion of Amazon's high-margin businesses, like its cloud and advertising segments.
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In April, Amazon said it planned to spend all of the $4 billion it expected to make in second quarter operating profits on COVID-19 related initiatives.

Despite all that spending, which included a pay raise for warehouse workers and investments in a new testing lab, Wall Street still expects Amazon to report a profitable quarter — $1.2 billion in operating profits — backed by strong lockdown-driven sales and accelerating growth in high-margin businesses.

The bullish forecast reflects Amazon's remarkable position as one of the biggest beneficiaries of the coronavirus pandemic. Behavioral changes resulting from COVID-19, such as increases in online shopping and cloud usage, are fueling Amazon's expansion even as the the pandemic roils its delivery and supply chain networks.

"Simply put, COVID-19, in our view, has injected Amazon with a growth hormone, in ways that rolling out one-day Prime shipping was not able to," D.A. Davidson's Tom Forte wrote in a note last week.

The company's stock is up roughly 60% this year, far outpacing the broader market that's been hampered by a struggling economy.

Amazon reports its second quarter earnings results on Thursday after the market closes.

Here's what Wall Street analysts are expecting for the quarter:

EPS (GAAP): $1.48, according to consensus estimates compiled by FactSet, vs. $5.22 last year
Revenue: $81.4 billion, according to consensus estimates compiled by FactSet, vs. $63.4 billion last year
AWS: $11.02 billion, according to consensus estimates compiled by FactSet, vs. $8.4 billion last year

Retail stores are closed, but Amazon is always open

All signs point to Amazon benefiting from heightened demand during the quarter, as more people shopped online amid stay-at-home orders and store closures across the country. Amazon's cloud service also likely saw a boost due to the increased use of apps by people working from home.

On top of that, investors believe Amazon's higher margin businesses, like advertising, saw continued growth during the quarter, helping expand its profitability and balance the $4 billion in planned COVID-19 related expenses.

"We continue to focus on Amazon's high margin revenue pools (AWS, advertising, Prime subscription revenue) that enable the company to continue to compete aggressively in retail, invest in new initiatives and deliver improving profitability," Morgan Stanley wrote in a recent note.

Here are some of the main topics investors will be focused on during Thursday's earnings conference call:

E-commerce sales: Investors want to know how exactly COVID-19 is accelerating Amazon's core e-commerce growth. Jefferies wrote in a note this week that the COVID-driven behavioral changes could result in "long-term opportunities beyond a near-term surge in online consumption." In particular, it said Amazon's grocery business could see increased engagement and a larger share of the market following the pandemic.
$4 billion COVID-related spend: Amazon already warned that it could spend more than $4 billion on COVID-related projects for the quarter. That includes a $500 million bonus pay, on top of wage increases, for warehouse workers, improved safety measures in its facilities, and roughly $300 million in building out its own testing lab. RBC wrote in a note that it'll be looking for more details around how the spend helped Amazon improve its supply chain and how much more it expects to spend to get back to normal.
Advertising growth: Amazon's advertising business, which sells ads to sellers on its site, has seen robust 40% growth rates in the last few quarters. SunTrust analysts believe COVID-19 likely helped accelerate that growth, as sellers continue to rely on Amazon's ads to drive sales. More importantly, ads are more profitable for Amazon, serving as an operating leverage that offsets higher costs in shipping and fulfillment, it said.

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