It’s quite remarkable that when Amazon.com, Inc. (NASDAQ:AMZN) reports second-quarter earnings on Thursday afternoon, it will have grown upwards of 28% with revenue of nearly $30 billion. If the company beats analyst expectations, results and growth might be even more impressive. But even if it doesn’t, Amazon stock is still a seemingly unstoppable beast.
The fact is that AMZN is now a massive company. Unlike most companies of its size, growth has not deteriorated or otherwise lost a beat.
Of course, that could add change when the company reports its second quarter.
Amazon stock is up roughly 40% from the last year and with a market capitalization of $350 billion, AMZN really needs to knock the ball out the park to keep its stock going higher. That said, what’s the best investment strategy for AMZN stock just days ahead of earnings?
Amazon Stock Earnings Preview
For the time being, AMZN still reports revenue as North American, International, and AWS.
Between analysts at Cantor Fitzgerald and Goldman Sachs, Amazon.com is expected to produce the following in each of its three segments.
| Segment | Expected Growth |
| North American | 25% to 28% |
| International | 17% to 19% |
| AWS | 57% to 58% |
The company’s reporting does not exactly showcase the diversification and innovation of Amazon.com, keeping many of its most important metrics like Prime membership ads and online grocery sales hidden.
Regardless, Amazon’s ability to penetrate and create new business segments keeps revenue growth robust. Furthermore, an increased mix of services and AWS growth is leading to earnings-per-share and margin growth, countering the historically poor margins of e-commerce.
In fact, AMZN is becoming more and more of a profit story, with the company expected to report non-GAAP EPS of $1.11 versus $0.19 per share last quarter. While investors like to see positive EPS, they also realize that Amazon continues to make big investments in infrastructure, content, logistics and research and development among other places. That’s why the market pays close attention to how much profit AMZN creates from operations, or operating income.
During its last quarter, operating income in AWS grew from $194 million to $604 million year-over-year. Moreover, North American operating income more than doubled to $588 million. Investors expect to see similar numbers if not slightly higher in Q2.
What to Expect From AMZN Stock
After its big gains over the last year, Amazon stock is stretched. Yes, Amazon remains a great company, but fact is that so much of its valuation is tied to the future and speculation. Its current operating performance does not support a market capitalization of $350 billion or anywhere close to it.
After all, Amazon.com is still largely considered a retailer with AWS less than 8% of its total revenue last year. Therefore, it is hard to foresee 20% to 30% upside in AMZN stock when a company like Wal-Mart Stores, Inc. (NYSE:WMT) has market value of just $230 billion.
With that said, any significant pullback in Amazon stock will create an excellent investment opportunity. Not only is there ongoing growth in e-commerce, Prime subscriptions and cost-cutting initiatives that make Amazon more attractive long-term, but AWS could very well be worth $300 billion to Amazon stock over the next decade, far more than any analyst or investor realizes.
Furthermore, there is no doubt AWS will become a bigger chunk of overall revenue, and that costs will decline as Amazon continues to make investments in infrastructure and logistics with drones and such.
The bottom line: Amazon stock may be stretched now, but long-term, there is still a great deal of value.
As of the time of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
