Expectations are high this earnings season for many of the tech stocks who have been seen as the stay-at-home winners.
Even though Netflix and Microsoft both beat their revenue guidance during the ‘Covid-19 quarter’, their stock prices have pulled back as investors weigh whether they can still justify their valuations.
As such, the focus of Amazon’s much anticipated Q2 earnings will be on what the company says about future guidance.
The online retailer has been a significant beneficiary of lockdown conditions as the online retail trend has strengthened. It is also a key name for many global and US equity strategies, with 15 per cent and 38 per cent of funds holding the stock, according to FE Analytics.
And, Amanda Lyons – manager of the $303.2m GAM Star Disruptive Growth fund – said it is likely to be a pivotal earnings announcement for the company. 
“Going into earnings, I would say expectations are super high,” Lyons (pictured) said. “Are they going to get a long-term benefit, or is it a one or two quarter boost, and the benefits from these two quarters totally goes away?”
She said: “They’ve got to deliver top line growth, that goes without saying, but the data point that is more important for Amazon is their margins.”
Last quarter Amazon beat their earnings guidance, but chief executive Jeff Bezos said he would be investing this quarter and gave guidance that margins would be zero, compared to a 5 per cent operating margin in Q1.
Lyons – who has a 4.7 per cent holding in Amazon in the GAM Star Disruptive Growth fund – said this quarter he needs to outperform that because the consensus is expecting margins to be above zero.
“If he follows through on what he says he is going to be taken as a negative,” she said.
The combination of high expectations for earnings and the valuation of the stock as a result of the massive rally it has had since the March sell-off means that there is no room for error on any fronts.
Performance of Amazon share price YTD
Source: Google Finance
“You can't have all of your data points but one be good, the one that is not good is going to be pounced upon,” Lyons said. “It's definitely a difficult earnings season to be going into,” said the GAM manager.
“Everything is priced to perfection, so you’ve got to deliver more than perfection because if you look at the whisper numbers, they are expecting a beat on the consensus numbers.
“So you’ve got to do better than beating the consensus and on top of that do some sort of guidance to show that it's not just one quarter, and you're going to continue on that trend going forward.”
Lyons said while this can be quite high to achieve, if Amazon doesn’t, it is more a result of expectations being so high rather than the company not delivering.
“The long-term story is still intact, the idea that we’re spending on cloud, we’ve only begun to scratch the surface on cloud infrastructure spend, it's a huge multi-year opportunity ahead,” she explained.
“I don’t think it's a one- or two-year story with Amazon: it’s a multi-year story. Spend has probably accelerated and maybe you see some deceleration in growth but I think it's going to be minimal.”
She said the question is whether there is acceleration on the acceleration and that's where there could be a little bit of a mismatch in the short term.
Lyons added: “Will they be able to maintain the levels of growth they saw at the end of last quarter and most likely into this quarter? Probably not.
“But have they brought forward and onboarded a whole new set of customers who will probably continue to spend and increase their spend over time? Yes.
“In the e-commerce space, that’s going to be key, can you keep those customers and get them to increase their spend over time? Amazon has a track record of doing exactly that.”
Not all Amazon investors are so certain of the long-term story. Hugh Grieves, manager of the £756m LF Miton US Opportunities fund said he has been a seller of Amazon for some time.
As of the end of June, the fund had a 3.35 per cent stake in the company, but Grieves (pictured) said he is still selling at these elevated valuations. 
“Sure. working from home and all of these trends has pulled forward a lot of spending and new people signing up to these businesses and services and that's what you saw with Netflix’s numbers,” he explained.
“But you’ve got to ask yourself if you didn't sign up for Netflix in Q2 of this year, when are you ever going to sign up?
“Pulling forward a lot of demand into Q2, so Q2 looks fantastic, but what you saw is they guided Q3 subscriber adds really low. That was a surprise and the stock pulled-back, but it shouldn't be.”
He warned a similar scenario could play out for Amazon.
“How much demand has been pulled forward into the second quarter and sucked out of Q3 and Q4?” he asked. “What you’re looking at is the second derivative, the rate of change in growth, and that's possibly going to turn negative in the second half of the year, because Q2 looks so good at the expense of Q3 and Q4.
“I think it's going to be very challenging for reality to meet the hype, because expectations are so high.”
Grieves said there is a possibility that Amazon could beat their earnings this quarter, which would mean their shares could still appreciate further.
However, he said a bad earnings outcome could be a catalyst for a dramatic pullback, and that if it doesn't happen this quarter, it could happen in any one of the upcoming quarters.
John Teahan, manager of the €45.6m RWC Global Enhanced Income fund, said when looking at growth rates and the valuation, Amazon “is behaving like a start-up”.
Indeed, Jeff Bezos has previously insisted that the company “must forever behave like a feisty start-up: innovate aggressively and expand relentlessly,” and Teahan said so far Bezos has succeeded at this, but he questioned whether this phenomenal growth rate could continue.
“In China, Amazon has been defeated by Alibaba. In the US, rivals like Walmart and Target have upped their online game,” he said. “The markets the company is doing well in are low growth, western Europe being an obvious example, whilst in the US the market for prime customers is pretty much satisfied.
“In emerging markets like India and Latin America its offering is struggling to get traction and faces other challenges, such as the nationalist policies of the Indian government.”
Furthermore, he warned that Amazon could face political headwinds because of the antitrust rhetoric that is gaining traction amongst both Republicans and Democrats who are discussing the possibility of breaking up the e-commerce giant.
He therefore said: “The big hope to keep the growth story going is AWS (Amazon Web Services), the cloud platform.”
Last year, Amazon Web Services accounted for 14 per cent of total revenues, but contributed for a quarter of revenue growth for the entire company, and was the most profitable segment with 26 per cent operating margins.
Teahan said that Amazon “must decide to either keep AWS to try to maintain the overall growth trajectory or spin it to make both more agile and potentially mitigate some of the challenges mentioned above”.
“At 143x earnings, with so many wishing its downfall, and with history against it, this is a fantastic case study,” he concluded. “If the trajectory continues it would truly make Amazon the eighth wonder of the world. For investors, I think it is one safer watched from the side lines.”
Performance of Amazon since IPO
Source: Google Finance
Amazon has returned 199,908 per cent since its IPO in 1997 (from a split-adjusted share price of $1.50 to $3,000), which equates to 39 per cent compound annual return.