Whether you love the company or hate it, there’s no denying Amazon.com, Inc. (NASDAQ:AMZN) is the 800 pound gorilla in the retail room … online, or offline. Although a true market share figure would be impossible to pinpoint, without a doubt, Amazon is the name all other players fear the most, and try to mimic.
The company is slated to remind the market on Thursday exactly why AMZN stock is up more than 2000% over the course of the past ten years.
Or, perhaps Thursday’s post-close announcement will keep some observers wondering how this minimally profitable (until very recently) organization manages to consistently draw such a bullish crowd.
Whatever the case, fireworks Thursday evening will easily carry through into Friday morning.
Amazon Earnings Outlook
As of the latest look, Amazon is expected to report a profit of $1.41 per share for its fourth fiscal quarter of last year, on revenue of $44.84 billion. The company earned $1.00 per share of AMZN stock in the same quarter a year earlier, when it reported $35.75 billion worth of revenue.
Amazon is headed into its quarterly earnings announcement with its usual impressive revenue-growth momentum. What’s relatively new is growing profits per share of Amazon stock. Over the course of the last four quarters, AMZN has earned $4.36 per share. That’s the best profitability the company has ever seen, and assuming Amazon has indeed turned a profit in its fourth quarter, 2016 will mark the first year the organization has posted a positive bottom line in every quarter of the year.
It’s not Amazon.com’s e-commerce business that’s pushing the company to such profitability though. While its foreign and domestic e-tailing operations are growing, Amazon Web Services is driving a big chunk of the top line’s growth, and the bulk of the company’s profit growth.
Case in point: During the third quarter, Amazon Web Services turned $3.2 billion in revenue (up 74% yoy) into operating income of $861 million. E-commerce sales were up 27% year-over-year, and lost money on an operating basis when factoring in the international arm’s loss.
Look for more of the same leadership from AWS going forward.
Amazon Stock: Three Things to Chew On
Amazon reliably has several pet projects on its plate, and shifts in its respective markets consistently pose new threats to its growth. At any given time though, there are only three matters that really work for or against AMZN stock. Thursday’s top hot buttons are the following:
Amazon’s entry into the package delivery game was largely cheered by owners of Amazon stock. The move puts the company in charge of its own destiny, and may well save on shipping costs. And just this week, AMZN announced it would be establishing a major air freight hub in Kentucky.
Yet, it was also this week that United Parcel Service, Inc. (NYSE:UPS) told us the advent of so many at-home deliveries driven by the ongoing rise of e-commerce (Amazon’s core business) is a tough way to make a buck. Amazon may not like what it gets when it starts handling more of its delivery work.
Real Cash Flow
It has been a point of contention — particularly for accountants — because it somewhat obscures the true health of AMZN’s cash flow. Given how big the numbers are getting though, Amazon stock owners may want to get a grip on the idea.
Long story made short, the costs associated with purchasing and managing all the servers needed to operate Amazon Web Services are being booked as capital leases rather than capital expenditures. This means payment for these leases isn’t deducted before calculating free cash flow … one of the metrics that’s enamored so many new investors. It’s not “wrong” per se, but it’s worth understanding.
More Competitive Competition
Finally, this week, rival Wal-Mart Stores Inc (NYSE:WMT) announced it was scrapping its membership-based free shipping scheme and instead simplified its online-shopping offer to free shipping for any order over $35.00.
One new tactic from Wal-Mart won’t rattle Amazon, but Wal-Mart’s move is just a microcosm of a bigger theme. Everyone is collectively taking aim at Amazon.com, and sooner or later, enough of those competitors will hit the target.
Bottom Line for AMZN Stock
AMZN shares were up 17% in 2016, and have gained 170% since the end of 2014 primarily because the market saw how potent AWS was going to be. Amazon Web Services can only do the heavy lifting for so long though. Sooner or later, e-commerce has to help out.
And the fourth quarter’s report could very easily be the one that prods such a change of heart.
See, expectations are low — analysts are only a calling a profit of $1.41 per share for AMZN stock. On the surface it seems like an easy target to top, but if traders have reason to see the glass as half-empty rather than half-full after Thursday’s close, nothing can be ruled out. Sometimes the market will punish a mere meet of lackluster estimates. (And if nothing else, investors may be ready to take some profits.)
On the other hand, most of the post-earnings responses AMZN has made in recent quarters were bullish ones. This is one of those names investors love to love.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.