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Here's Why Investors Will Pay Attention to Amazon's Holiday Predictions This Week

E-commerce and cloud computing giant Amazon.com (NASDAQ: AMZN) will drop its third-quarter earnings report after the closing bell on Thursday. Here's what investors should expect -- and look for -- in Amazon's business update.

Q3 by the numbers

The current Wall Street consensus calls for adjusted third-quarter earnings to fall 21% year over year, landing near $4.57 per diluted share. Revenue is expected to be approximately $68.8 billion, or 22% above the year-ago quarter.

At the midpoint of Amazon's third-quarter guidance, sales should land in the neighborhood of $68 million. The company doesn't offer bottom-line earnings forecasts, but operating profits were aimed at roughly $2.6 billion. That would be 30% below the operating income collected in the third quarter of 2018.

Amazon's operating-profit forecasts always cast a wide net, and this one followed that tradition. Management would not be surprised to see this metric stopping anywhere between $2.1 billion and $3.1 billion.

A herd of blue Amazon Prime delivery vans

Image source: Amazon.

Shipping costs on the rise

Even the top end of Amazon's guidance would result in operating income falling year over year. That's chiefly a result of higher operating costs related to the recently introduced one-day delivery policy for Amazon Prime shipments.

"We've seen this before: We have had large changes to our distribution and transportation network repeatedly in our history, from going from media to a vast variety of different product lines, hard lines, non-sortable as we call them," chief financial officer Brian Olsavsky said on the second-quarter earnings call. "The initial two-days Prime shipping offer that we launched many years ago, the great expansion of our network to include [Fulfillment by Amazon] merchants and capacity for them, and more recently the first steps to increase One-Day and Same-Day, although on a much smaller scale."

All of these shipping policy updates have triggered "shocks to the system," but Amazon worked through those issues and continued to push forward. Unique shipping programs are seen as a competitive advantage setting Amazon apart from less adventurous rivals. Keep an eye peeled for updates on how the one-day shipping program's costs are shaping up, and whether the program is making a measurable difference to Amazon's Prime membership numbers.

The holidays can move this stock even before Halloween

More than anything else, the one thing that tends to move Amazon's stock prices after each year's third-quarter report is actually all about the next reporting period: The holiday-themed fourth quarter is the biggest revenue-generating quarter each year, closely tied to outsized cash flow delivery. See if you can spot Amazon's fourth-quarter reports in this long-term view of quarterly sales and free cash flow:

AMZN Revenue (Quarterly) Chart

AMZN Revenue (Quarterly) data by YCharts.

Therefore, analysts and investors will be looking for Amazon's guidance targets for the fourth quarter. Wall Street's best guess at the moment calls for fourth-quarter sales near $87.4 billion, and holiday earnings in the neighborhood of $6.49 per share. Revenue projections above or below that mark should have market-moving powers, and investors should look for the operating-income forecast to top the 7% year-over-year growth implied by Wall Street's bottom-line view.

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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. Anders Bylund owns shares of Amazon. 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.

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