Can Amazon’s (AMZN) earnings be the catalyst get the stock out of its tight trading range? The e-commerce and cloud computing giant, which is set to report third quarter fiscal earnings results after the closing Thursday, has traded in a tight range.
Amazon shares have bounced between $1,800 to $2,000 over the past twelve months. And since reaching its all-time high of $2,050.50 in September 2018 the stock has corrected as much as 15%. The company’s second quarter EPS miss didn’t help. Nor has regulatory scrutiny it has received regarding proposed breakup of its platform. However, strong top line growth on Thursday and a solid earnings beat could be just want the doctor ordered.
The company is not only investing massively for growth, but that level of spending tend to impact the bottom line, making earnings unpredictable. Much of the pressure the stock has been under, falling 15% since July, has been due to the profit visibility. That said, among other possible tailwinds, analysts continue to believe Amazon’s one-day shipping initiative will continue to drive revenue acceleration through the rest of the year. How investors react to the stock remains to be seen.
In the three months that ended September, the Seattle-based company is expected to earn $4.60 per share on revenue of $68.79 billion. This compares to the year-ago quarter when earnings came to $5.75 per share on revenue of $56.58 billion. For the full year, ending in December, EPS is expected to rise 16.8% year over year to $23.53 per share, while full year revenue of $279.08 billion would rise 19.8% year over year.
Assuming the company reports the expected $4.60 EPS for the quarter, that would represent a 20% decline from the year-ago quarter, marking the company’s first decline in nine quarters. The company’s free one-day shipping initiative is expected to be the reason for the profit decline. Amazon committed $800 million to this initiative, which weighed on the Q2 EPS miss. Investors will want more details on that, in addition to ongoing investments the company plans to make.
Revenue for the quarter, however, is expected to rise 22%, thanks in part, to the strength of Amazon Web Services (AWS), which has traditionally been the company’s bread-and-butter business. The Street will want clarity on operating margin for AWS, which saw a decline in Q2 - the third straight quarter of declines. The management explained that the decline was due to the timing of investments in sales and marketing personnel.
AWS has received intense competition from Microsoft’s (MSFT) Azure, which has surpassed Amazon as the leading cloud vendor. In Q2 AWS delivered revenue of $8.38 billion vs. the $8.5 billion analysts were looking for. Revenue from the segment rose 37%, down from the 41% growth in Q1. On Thursday investors will to see the extent AWS can continue to grow, relative to Microsoft, and whether Amazon can find ways to squeeze more profits our of its most-lucrative business.
Assuming AWS grows in a range of 40% to 45% this quarter, enough to surpass Street forecast of $8.5 billion, Amazon stock is poised to drive higher.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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