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Amazon Earnings: What to Watch

Boxes in an Amazon fulfillment center

Consistently crushing expectations with its quarterly earnings releases recently, (NASDAQ: AMZN) has set the bar high going into its third-quarter update later this month. In the company's most recent quarter, for instance, the e-commerce and cloud computing giant spoiled investors with 39% year-over-year revenue growth and 1,168% earnings-per-share growth .

Can Amazon keep up its extraordinary momentum? Ahead of the company's Oct. 25 third-quarter update, here's a preview of two areas investors may want to watch when Amazon reports its results.

Boxes in an Amazon fulfillment center

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Amazon Web Services

Amazon's cloud computing arm, AWS , isn't just a side business for the e-commerce company. AWS accounts for a huge portion of Amazon's overall operating income and is growing at a rapid pace.

For the six months ending June 30, 2018 for instance, AWS' operating income of $3.04 billion represented 62% of Amazon's overall operating income during this period. Even more impressive, AWS' revenue and operating income for this six-month period increased 49% and 68%, respectively, compared to the same period in 2017.

Investors should expect similar growth rates for AWS in Q3. Momentum seems as strong as ever, as the cloud computing business' revenue growth rate actually accelerated slightly in Q2, rising 49% year over year in constant currency compared to 48% in Q1.

Operating margin

Amazon has been seeing huge improvement in its operating margin (operating profit as a percentage of revenue) thanks to strong operating leverage across its business. Its second-quarter operating margin was 5.6%, up from 1.7% in the year-ago quarter.

While Amazon's profitability is expected to continue to improve, the company's operating margin isn't very predictable on a quarter-to-quarter basis. Big investments or slightly higher- or lower-than-expected revenue can have a big impact on Amazon's quarterly operating profits and, in turn, its operating margin. Indeed, this is why Amazon guided for such a wide range of operating profit in Q3. The company said it expected an operating profit between $1.4 billion and $2.4 billion.

But as long as Amazon hits its operating profit guidance, investors can expect a big increase in the company's operating margin compared to the year-ago quarter, when it was just 0.8% -- on only $347 million in operating profit. Amazon's guidance for third-quarter revenue between $54 billion and $57.5 billion and its outlook for operating income implies an expected operating margin anywhere between 2.6% and 4.2%.

Investors will get a look at whether Amazon kept up its strong momentum when the company reports its third-quarter results on Thursday, Oct. 25, after market close.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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