Amazon (NASDAQ:AMZN) reports third-quarter earnings after the market closes on Thursday. AMZN stock was down slightly on Wednesday (It’s actually slipped a total of 1.3% since Monday), but what will happen today?
Last quarter, the Amazon stock price took a hit after an earnings miss and weaker than expected Q3 guidance. There are four big factors with the potential to have a material impact on what Amazon reports this time around.
Amazon Web Services
Amazon’s most visible line of business may be its online retail operations, but the driver of profit these days is Amazon Web Services (AWS). The company’s cloud computing division accounted for $8.38 billion in revenue in Q2, and $2.12 billion in operating income — that’s over half of Amazon’s total income for the quarter.
While AWS has been growing rapidly, the pace slowed last quarter even as the growth of Microsoft’s (NASDAQ:MSFT) competing Azure cloud services picked up. We’ll be watching to see if AWS revenue slows again this quarter. If it does, that is going to be reflected in the valuation of Amazon stock.
Prime Day Results and AMZN Stock
Prime Day (which was actually two days this year) is expected to have been Amazon’s biggest sales event of 2019. It was held on July 15 and 16, so those results will be included in the company’s Q3 earnings. Based on the press release put out by the company the following day, it should be good news for AMZN stock.
The company says Prime Day 2019 saw Amazon Prime members purchase over 175 million products, with sales exceeding the previous year’s Black Friday and Cyber Monday numbers combined. In addition, Amazon spiked out the success enjoyed by independent, third-party sellers on Amazon Marketplace. More on those third-party sellers shortly, when we touch on the subject of China.
Amazon Stock and One-Day Shipping
In April, Amazon announced it was spending $800 million in Q2 to begin rolling out a same-day Prime shipping program. There’s a lot riding on one-day shipping, with retail rivals like Walmart (NYSE:WMT) pushing into Amazon’s e-commerce territory. In fact, Walmart announced its own one-day shipping program shortly after AMZN did.
Expect to hear a progress report on same-day Prime shipping, including potential cost over-runs and whether one-day shipping has helped to boost Prime member spending.
Trade War With China
Looming in the background for the past year has been the ongoing trade war between the U.S. and China. Aside from the risk an extended dispute between the world’s two largest economies could trigger a global recession — which would cut consumer spending and impact all retailers — Amazon has a weak spot in its third-party vendors. These small businesses were responsible for 58% of physical merchandise sales on Amazon in 2018, with AMZN making money by collecting a percentage of that revenue.
If tariffs imposed by the U.S. on Chinese goods escalate, that means higher prices for third-party Amazon Marketplace sellers. Adweek reported that among third-party sellers on Amazon, sourcing of products from China is “widespread.” Analysts will be watching to see whether tariffs and a crackdown on sales of counterfeit Chinese products (another result of the trade war) have had an impact on Amazon’s Marketplace revenue.
Bottom Line for AMZN Stock?
If there’s one thing to count on, it’s that AMZN will grow its revenue again this quarter, and most likely in a big way.
Harvard Business School professor Sunil Gupta summed that up in a Harvard Business Review podcast earlier this year:
If you look at Amazon, it has grown the top line 20, 25% every quarter without fail, except for one quarter in 2001. Right now, it’s in 2019, their sales are 232 billion. I don’t know that many companies, which grow at that rate, even when they’re over 200 billion.
Note: in Q1 2019, Amazon reported revenue growth of 16.9%, marking another instance of slipping below 20% year-over-year.
The big questions are, how much will that revenue growth be, and will the company hit earnings projections? In its Q3 guidance, Amazon said to expect revenue in the $66 billion to $70 billion range — which would represent growth of anywhere from 17% to 24%.
Analysts are looking for EPS of $4.59 for the quarter. Whatever the outcome tonight, those analysts remain solidly bullish when it comes to AMZN stock, with 44 of 48 rating it a “buy” and an average $2,290.61 price target.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
