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.
Amazon’s decelerated profit growth has been one the key reasons for the stock’s struggles over the past year. The company’s investments its workforce along with research and development has taken a sizable portion of what would have otherwise been its profits. However, as with other tech giants, Amazon have begun to take aggressive steps to right-size its business. Will investors be patient enough to allow the company to execute? This answer will be evident once the company reports fourth quarter fiscal 2022 earnings results after the closing bell Thursday.
Amazon in early January announced plans to reduce an estimated 18,000 jobs, which amounts to roughly 1% of its workforce. The early round of job cuts targeted the company’s Devices and Services group, which builds the Alexa digital assistant and Echo smart speakers. Bloomberg reports suggests that the next round of job cuts will be in the retail division and human resources. These aggressive measure is expected to boost the company’s bottom lines in the quarters and years ahead.
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 that has impacted consumer spending. With the stock losing roughly a third of its value in the past year, now seems like an ideal time to place a bet on a recovery for the next 12 to 18 months. However, 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 December, the Seattle-based company is expected to earn 17 cents per share on revenue of $145.37 billion. This compares to the year-ago quarter when earnings came to $1.39 per share on revenue of $137.41 billion. For the full year, the company is expected to post a per-share loss of 12 cents, reversing a profit of $3.24 a year ago, while full year revenue of $510.2 billion would rise 8.6% 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. It’s not a surprise that the company guided for Q4 revenue to rise between 2% and 8% given how sharply consumer sentiment has deteriorated. The question will be about the guidance for the first quarter and fiscal year 2023. On the bright side, there’s still Amazon Web Services which is expected to deliver revenue growth of close to 30%.
The company’s dominant cloud platform is also expected to post strong profitability, driven by growing product adoption within its large enterprise customers. In the third quarter, Amazon generated mixed results. Q3 revenue was $127.10 billion, rising 15% year over year but missed analyst estimates by $370 million. AWS segment revenue increased 27% year over year to $20.5 billion, or rising 28%. Operating income declined to $2.5 billion due to operating losses in both North America and International segments that dragged on $5.4 billion in income from AWS.
So it’s not a surprise that the company is now focusing on increased profitability. With the stock at $102, while being down close to 30% from its 52-week high of $170, 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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