With a gain of 23% year to date, besting the 7% rise in the S&P 500 index, Amazon (AMZN) stock has been one of the better-performing names within the tech sector. Investors want to know if the company can maintain its strong momentum.
The nation’s second largest retailer is set to report first quarter fiscal 2023 earnings results after the closing bell Thursday. Concerns over rising interest rates and inflation are presenting threats to consumer spending, which is an estimated 70% of the U.S. economic growth as a share of GDP. Aside from being a threat to future revenue, inflation is also driving up operating expenses for several companies, including Amazon, which has experienced decelerated profit growth.
However, in response to an uncertain macro backdrop, management has implemented some aggressive cost-saving measures to boost both profitability and its margin profile. These measures include shutting down unprofitable businesses, reducing its global headcount and reprioritizing resources in an effort to right-size the business. The goal is to emerge leaner and stronger. On the bright side, there’s still Amazon Web Services which has been the company’s main profit producer.
Although growth in AWS is slowing due to global macroeconomic uncertainty, it is approaching $90 billion annualized revenue run rate. While AWS continues to have a strong pipeline for attracting new customers, investors will want to know when cloud growth will re-accelerate. From a valuation perspective, Amazon still looks like a bargain with its shares still down some 32% over the past year. For that to matter in the near term, on Thursday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return investment thesis.
In the three months that ended March, the Seattle-based company is expected to earn 22 cents per share on revenue of $124.53 billion. This compares to the year-ago loss of 38 cents per share on revenue of $116.44 billion. For the full year, ending in December, earnings are expected to be $1.41 per share, reversing a year-ago loss of 27 cents, while full year revenue of $556.48 billion would rise 8.3% year over year.
The projected year-over-year increase in full-year profit of $1.41 per share, reversing a year-ago loss, is one of several reasons why Amazon stock has risen year. This highlights the sort of outcome the company will realize from right-sizing its business. However, since the start of the quarter, revenue and earnings estimates have been revised lower, suggesting the market’s growing concerns about the company’s ability to navigate through the challenging inflationary environment.
As the company is aggressively cutting costs, Amazon remains committed to investing in the long-term potential of its business. There’s also Amazon Web Services where analysts are still projecting 15% year-over-year growth for AWS in the first quarter with current market consensus being $21 billion in revenue. In the fourth quarter, Amazon delivered mixed results, posting adjusted EPS of 3 cents per share which missed estimates by 14 cents.
Fourth quarter revenue, however, surpassed Street estimates, coming in at $149.2 billion, rising 8.6% year over year, above consensus estimates by $145.7 billion. Revenue was driven by the AWS cloud segment which grew 20% year over year to $21.4 billion, but missed estimates of $21.76 billion. The miss on AWS was partially offset by strong growth in advertising revenue. Still, the miss on the bottom line pressures the stock, affirming the company’s new focus on increased profitability.
With the stock trading at around $106, Amazon's risk-versus-reward profile suggests the stock could produce strong returns in the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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