Amazon.com (NASDAQ: AMZN) is scheduled to report quarterly earnings this Thursday, July 25 after the market closes. Expectations are already high. And why not? In the last quarter, the diversified online retail giant reported exceptional strength. As it builds stronger delivery channels, Amazon — and AMZN stock — will generate more sales and grow at an even faster pace.
For the second quarter, analysts are anticipating Amazon stock to report EPS of $5.59 and revenues of $62.5 billion. This would represent a 10.2% YoY increase and an 18.1% YoY increase respectively. I think earnings are likely to impress again, for two key reasons.
First Quarter Earnings for Amazon Stock
In the first quarter, Amazon.com reported free cash flow doubling from last year, on a trailing twelve-month period. Share count remained steady at 507 million, which is good news for the shareholder. Management is managing dilution and limiting the impact of stock-based awards. Revenue grew 17% to $59.7 billion as EPS of $7.09 easily beat consensus estimates by $2.42. Since AMZN stock rose just 3.7% in the quarter after bouncing back from the $1,700 low, it may trade higher if it beats consensus.
The company kept operating costs steady. Last quarter, costs related to fulfillment center capacity or infrastructure are lower, compared to last year. Hiring also slowed, growing only 12% on a trailing 12-month basis. For the upcoming quarter and the rest of the year, expect operating costs to increase–particularly as it relates to the switch to One Day Prime Shipping.
One Day Prime Shipping
Investors should expect a higher ROI as the company evolves its Prime free two-day shipping program into a one-day shipping program. It is able to cut down the delivery time because of the big investments it made in fulfillment and logistics over the last two decades. Still, Amazon is going to pay a hefty price tag for the transition. Amazon said that it anticipated spending $800 million in the second quarter.
Long term, the spending makes sense. The expedited shipping for Prime members will draw more of its customers to join the program and should increase sales as well since people now only have to wait one day longer to get their purchases than they would by going to a traditional brick-and-mortar retailer. The higher subscription revenues from Prime and the higher sales from faster shipping will drive Amazon stock higher.
High valuations will not constrain the stock’s upside as markets buy into the continuing growth story.
AWS Is Still the Segment to Watch
Outside of the online retail business, investors should expect a strong performance from Amazon Web Services — or AWS.
In the first quarter, AWS sales grew 41% year-over-year to $7.6 billion in the first quarter. This is an incredible $30 billion at an annualized run rate. Operating income grew 59% to $2.22 billion. Operating margin grew by 320 basis points in Q1. Investments in its infrastructure and efficiencies drove the profitability rate in the period. Amazon’s sales and tech team expansion will lead to this pace of growth for many quarters ahead.
Amazon’s alliance with Volkswagen widens the addressable market for AWS. The plan is for AWS to power the Volkswagen Industrial Cloud, which will integrate over 30,000 facilities and 1,500 suppliers. Managing VW’s global supply chain gives the AWS unit consistent revenue over the long term. Ford Motor Company (NYSE: F) also selected Amazon to power its cars. The contract win might lead to more enterprise migrations to AWS.
This gives the service a wider lead over its competitors, such as Alphabet’s (NASDAQ: GOOG) Google Cloud and Microsoft (NASDAQ: MSFT) Azure.
Price Target for Amazon Stock
Investors may use a variety of models to arrive at a fair value for Amazon stock. In a 5-year DCF Growth Exit model, assuming a perpetuity growth rate of 4% implies Amazon stock is worth $2,157 — 8.7% higher than its current price.
This conservative price target is below the average analyst price target of $2,268 (per TipRanks). Either way, Amazon stock gives investors everything they need in the online retailing space. AWS, strong online retail demand, and a healthy revenue mix are all positive characteristics of the company. This suggests the stock is worth owning.
But consider waiting until after the Q2 report before committing to a long position. In all but 2 of the last 13 quarters, AMZN beat on earnings, with a whopping 50.1% beat last quarter. (Expected EPS was $4.72 and Amazon reported $7.09.)
Amazon has beat on expectations for six quarters in a row. With AWS firing on all cylinders and the switch to One-Day Prime Shipping, expect that streak to hit seven.
Disclosure: Author owns shares of Ford.
