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Amazon (AMZN) Reports Q3 Earnings Today: Will It Top or Flop?

E-commerce giant Amazon.com, Inc. AMZN is set to report third-quarter results today, after market close. It has been a topsy-turvy journey for Amazon so far this year. After the company’s shares touched a 52-week high in mid-July, it nosedived on a second-quarter earnings miss. In fact, its stock has declined 10.6% over the past three-month period.

 

Does this mean Amazon is a bargain now, and you should buy its shares ahead of the earnings release? The answer is not really! After all, Wall Street analysts’ view on Amazon’s third-quarter performance points to mixed results. Here’s why –

Jeff Bezos’ company had already declared that its Prime Day sales in July were “once again the largest shopping event in Amazon history.” In fact, sales rose 2.8% at Internet retailers in July mostly due to significant spending during the Amazon Prime Day period, according to the Commerce Department.

Further, the event was longer this time around. The sale took place for 48 hours in 2019, up from 36 hours in 2018. Nonetheless, such promising sales figures should get reflected in the company’s third-quarter results.

By the way, the biggest contributor toward Amazon’s success is its growth in cloud computing operations. Its Amazon Web Services (AWS) is well ahead of rivals Microsoft Corporation MSFT, Alphabet Inc. GOOGL and Oracle Corporation ORCL.

AWS basically offers corporations and individuals to use its cloud services to operate websites, databases and various other programs. AWS single-handily contributed to more than 13% of Amazon’s revenues in the second quarter. Revenues from the AWS segment went up 37% on a year-over-year basis in the second quarter.

And with digital transformation continuing to take place in the current scenario, AWS will certainly be an industry leader. Thus, it’s expected that AWS will contribute toward the company’s revenue growth in the third quarter. Analysts now expect the company’s revenues for the third quarter to jump to $68.57 billion from $56.58 billion a year ago.

 

But, there are concerns about the cost of one-day shipping. In order to deliver at a brisk pace, Amazon has shortened its standard two-day shopping option for several of its products to one-day. In April, the company had said that faster shipping will be available for nearly 100 million items that were earlier shipped within two days.

Now that’s a great move as it would improve the company’s competitive position in the long run. At the same time, shortening the shipping period will increase cost and affect profit margins. And that’s exactly what happened in the second quarter. Amazon had said that shortening of shipping period had resulted in nearly an additional cost of $800 million in the second quarter. What’s more, Amazon expects its profit margin to have been under pressure in the third quarter due to its push for same-day delivery.

The Federal Trade Commission’s increasing regulatory scrutiny on the company along with slowdown in both U.S. and global economic growth may also weigh on Amazon’s third-quarter profit margins.

Amazon by the way has an Earnings ESP of +35.13%. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat for a company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

However, though the company has a positive ESP, its Zacks Rank #4 (Sell) dims possibilities of a beat. To put this into perspective, analysts now expect the company’s third-quarter earnings per share to drop to $4.46 from $5.75 a year ago.

 

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