There’s no question that rising interest rates and inflation are present 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 - something that has impacted Amazon (AMZN), the nation’s second-largest retailer.
Over the past few quarters, investors have questioned whether Amazon can overcome these headwinds. The answers have been reflected in the stock which is down more than 28% year to date, including 30.5 over the past year. The company's decelerated profit growth has been one the key reasons for the stock’s struggles so far this year. Now could be a time to buy as the company gears up to report its third quarter fiscal 2022 earnings results after the closing bell Thursday.
The company’s investments in its workforce, along with research and development, has taken a sizable portion of what would have otherwise fallen to its operating income bucket. These expenses, along with the recent expansion of its data centers and logistics capabilities, have hurt Amazon's bottom line, culminating in a Q1 reported loss of $3.8 billion. Not only was this its first quarterly loss in seven years, its operating income fell from $8.9 billion to $3.7 billion, while its operating margin dropped by 5% to 3.2%.
But fast forward two quarters later, investors expect a different story. Shares are have risen close to 10% over the past week. Investors are anticipating for the company’s aggressive spending to eventually bear fruit. Not only will these investments help widen Amazon’s competitive moat, but Amazon is poised to deliver strong returns on these investments, while delivering sustained cash flow generation. On Thursday beyond a top- and bottom line beat, investors will want strong profit guidance to support the long-term return on investment thesis.
In the three months that ended September, the Seattle-based company is expected to earn 22 cents per share on revenue of $127.57 billion. This compares to the year-ago quarter when earnings came to 31 cents per share on revenue of $110.81 billion. For the full year, ending in December, earnings are expected to be 10 cents per share, down from $3.24 a year ago, while full year revenue of $520.81 billion would rise 10.9% year over year.
The projected year-over-year decline in full-year profit is one of several reasons why Amazon stock has been under pressure this year. Since the second quarter ended, consensus EPS estimates have been revised down 35 times. This suggests the Street is not confident the company can overcome the inflationary pressures consumers are dealing with. Part of the reason could be due to the results of the company’s Prime Early Access event held in October, aimed at boosting e-commerce revenue.
The company’s e-commerce revenue account for more than 50% of total revenues. However, over the past two quarters the revenue trend has been to the downside, marked by a 4.3% decline in e-commerce revenue in the third quarter. Given how sharply consumer sentiment has deteriorated, it wouldn't be a surprise to see another declining in e-commerce revenue. The question will be about the guidance for the all-important holiday shopping season.
Just as important will be the results from AWS. In the second quarter, AWS showed strong acceleration, producing revenue of $19.74 billion, compared to $14.8 billion in Q2 2021. AWS Q2 margins were also strong, rising to 33.3% in the quarter, compared to 30.4% the year prior. On Thursday the market will want to see whether Amazon can improve on these metrics in the next several quarters.
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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