Amazon (AMZN) Earnings Preview: 3 Things to Watch

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Amazon.com, Inc. (NASDAQ:AMZN) reports earnings after the bell on Thursday, and Wall Street will be eagerly waiting to see how AMZN closes out the last quarter of fiscal 2014.

amazon amzn earnings preview 3 things to watchHopefully for investors, Amazon breaks its current losing streak: AMZN stock has failed to beat consensus earnings per share estimates for the past six quarters.

Perhaps that’s why markets have soured on AMZN stock recently. Amazon stock is down more than 20% in the past year, underperforming the S&P 500 (INDEXSP:.INX) by a whopping 35%. Can Jeff Bezos’ e-commerce empire turn things around and start 2015 off with a bang? It all hangs on Amazon’s Q4 earnings.

AMZN Stock Earnings: The 3 Factors to Consider

Amazon stock investors would probably prefer to forget 2014, which was largely characterized by slumping margins and of course the company’s failed Amazon Fire Phone. The Amazon Fire Phone was probably the biggest blunder of the year, reportedly selling 35,000 units in 25 days on the market.

But it isn’t all doom and gloom with AMZN stock. The Seattle, Washington-based e-tailer added more than 10 million Prime subscribers over the holidays, perhaps bringing the total to as many as 50 million or 60 million.

In short, Amazon earnings this quarter are something of an enigma. Here are three things to watch for:

  • EPS: AMZN 4Q EPS are expected to come in at 17 cents in the fourth quarter. Well, I should say 17 cents is the average estimate. Wall Street pros have absolutely no clue what to expect, with estimates ranging from a loss of 41 cents per share to a profit of 56 cents per share. At 17 cents, AMZN EPS would be just a third of what they were in 4Q 2014. Analysts are looking for $29.68 billion in revenue, an increase of 16% year-over-year.
  • Gross margins: Analysts are all over the board on this figure as well, but Carlos Kirjner of Alliance Bernstein is bullish, noting that “the Street has underestimated Amazon’s gross profit margins every quarter for more than two years.” A change in the product mix shift to higher-margin categories like consumables and apparel, as well as lower fuel surcharges, are also cited in support of this. Alliance Bernstein‘s bullish estimates call for a gross margin of 29%, while consensus estimates expect 28% for AMZN.
  • Foreign exchange headwinds: With such a large international presence — about 38% of revenue comes from abroad — the strengthening dollar doesn’t always work to AMZN stock’s advantage. Kirjner of Alliance Bernstein expects FX headwinds to hit revenue by $920 million, or 360 basis points, in the fourth quarter alone. With no end in sight to the Eurozone’s problems and investors still flocking to the dollar, expect this to be a focus of the company’s own internal forecasts going forward in 2015.

While those three things — EPS, gross margins, and foreign exchange effects — should be central to how the stock market reacts to Amazon earnings on Thursday, perhaps the most interesting long-term story is the growth of Amazon Web Services (AWS), the company’s wildly successful, fast-growing segment offering cloud computing services.

A growing number of company job posts over the last three years leads Alliance Bernstein to believe the division has undergone significant headcount additions. While those costs will dent the short-term ceiling of AMZN stock, the Wall Street research firm expects margins to take off when AWS eventually reaches scale.

The only question is: Will AMZN investors wait for that day or abandon the stock before it comes? Thursday’s earnings might let us glimpse the answer.

As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid.

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