Investors usually get excited about the upcoming holiday season for Amazon (AMZN), as the company’s dominant position usually translates into a nice boost in revenue growth.
But during the past few years, there has been another key part of the story — that is, the cloud business, dubbed Amazon Web Services. Since the numbers are now being disclosed, there is another nice lever for investors to get excited about.
And yes, the result has been a nice move in AMZN stock ahead of the earnings report. Since late September, the shares have notched 13%. Hey, what correction?
OK, so what about AMZN stock now? Well, to see, let’s take a look at the forecast of the Amazon earnings report for the third quarter, which is expected to come out Thursday after the market closes.
Amazon Earnings Preview
The consensus is calling for revenues of $24.91 billion, up 21% on a year-over-year basis. Although, as for the bottom-line, the Street is estimating a loss of 13 cents per share, down from the loss of 95 cents in the same period a year ago. But for the most part, the focus will likely be on the revenue side when it comes to the performance of AMZN stock.
The good news is that there should be some nice catalysts. Let’s face it, there seems to be no slacking with the megatrend of e-commerce. If anything, the recent announcement by Walmart (WMT) to substantially boost capital expenditures in this segment is a clear sign of its importance. Oh, and the drop in WMT stock is probably due in part to the continued gains in market share for AMZN.
To keep building on its lead, Amazon has been aggressively investing in areas like logistics, distribution and even delivery. But then there is also the Prime service, which has been key in developing strong customer loyalty.
Research from Consumer Intelligence Research Partners shows the program is seeing nice acceleration, indicating 3 million new U.S. subscribers in Q3 for a total of 47 million. If so, the growth rate was about 62% in the quarter on a year-over-year basis. CIRP also noted that a typical Prime member spends about $1,200 per year, which is twice what a nonmember spends.
All great, right? Definitely. But again, it seems that investors in AMZN stock will be eagerly anticipating the results from Amazon Web Services. Consider that last quarter the unit posted a sizzling 81.5% jump in revenues, up from a 49% increase in Q1.
Cloud computing is certainly becoming the preferred way for companies to handle their IT needs. There is often less need for expensive consultants to setup systems and maintain them. There are also advantages of seamless upgrades because of the connections to the Internet.
Interestingly enough, the travails at companies like IBM (IBM) and Hewlett-Packard (HPQ) probably have much to do with the rapid shift from legacy software to the cloud. As for Amazon Web Service, there is definitely the advantage of having the experience of managing the scale of the largest e-commerce website, which handles mind-boggling numbers of transactions quickly and securely.
Bottom Line on AMZN Stock
Despite all this, investors in AMZN stock may still want to be cautious. Q3 can be a dicey quarter, as seen last year. There can be negative impacts because of the huge investments needed to gear up for the holiday season.
What’s more, the Amazon Web Service is likely impacted from major deals, which can result in uneven revenue growth.
In other words, even a small miss could mean lots of pressure AMZN stock. After all, just look at what’s happened with some other highfliers for the current earnings season like Netflix (NFLX), which is off nearly 14% since its latest report.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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