- Ecommerce sales are expected to return to growth
- AWS sales growth is forecast to slow for a sixth consecutive quarter
- All eyes on how quickly AWS is adopting AI workloads to counter subdued enterprise spend
- Amazon likely to follow Microsoft and Alphabet in raising investment to get cloud computing arms ready for influx of AI demand
- Weaker profit profile versus Big Tech rivals could heighten need to offset through cost-cutting and efficiencies
- Outlook for the second half is rosy, with operating profits forecast to more than double as trends normalise
- Amazon is worth less than half the peaks we saw during the pandemic, but in the last four years we have seen revenue more than double and annual profits rise by some 50%!
Amazon earnings date
Amazon will release second quarter earnings after US markets close on Thursday August 3. A conference call is scheduled on the same day at 1430 PT.
Amazon earnings forecast: Q2 consensus
Amazon is forecast to report a 8.6% year-on-year rise in revenue to $131.6 billion and deliver diluted EPS of $0.40, turning from the $0.20 loss we saw the year before.
Some other key figures to look out for, according to consensus numbers from Bloomberg:
- Operating income is expected to be up 42% from last year at $4.7 billion
- Amazon Web Services (AWS) is forecast to deliver a 10% rise in revenue to $27.7 billion but a 11.8% drop in operating income to $5.0 billion
Amazon earnings preview
The outlook is improving for Amazon and the second quarter should be a turning point, although it has a job to do in delivering a convincing outlook to keep investors on side – especially as all of its businesses are highly sensitive to what is proving to be an uncertain economic outlook.
AWS, its cloud computing arm that generates the bulk of Amazon’s profits, will be the central focus this week. The business is suffering from a slowdown now that businesses are scaling back their IT spending to put the brakes on years of rapid growth. This is expected to be the sixth consecutive quarter of slower growth. Plus, Amazon has vowed to be as supportive to customers as possible and retain its market-leading position, which has contributed to lower margins. Slower growth and poorer profitability will lead to a 12% drop in AWS earnings this quarter.
Margins at AWS are also likely to be taking a hit from the need to ready its datacentres for the ravenous appetite for artificial intelligence applications. Both Microsoft and Alphabet signalled they are raising investment to get their data centres, other hardware and cloud computing arms ready. Both companies said they are accelerating their AI investments, which may cause concerns that profitability may come under pressure as costs increase before any serious monetisation of AI happens. However, both are attempting to remain disciplined with costs and moving resources from other departments because AI is a top priority, signalling they are taking action to mitigate any negative impacts from AI investments.
This is more significant for Amazon because it simply isn’t as profitable as its Big Tech rivals because of its determination to keep expanding. This may heighten the need for Amazon to counter any increase in investment with cost savings elsewhere if it wants to protect profits at its star business. Amazon has had a tougher time dealing with inflationary pressures and costs are still rising at a faster pace than other Big Tech rivals, but the pressure is easing and margins are bouncing back – but any deterioration at AWS could threaten this improvement going forward. Fulfilment and everyday costs are falling but Amazon continues to raise spending on technology and marketing.
Investors will also want to gauge how much AI-related demand AWS is seeing. Microsoft had an edge when AI became the hottest work on Wall Street earlier this year as its cloud computing arm quickly became busy dealing with AI workloads from ChatGPT, which may have given Microsoft a head start and leave Amazon still trying to find its feet this quarter. We know that AI workloads contributed about 1% growth to Microsoft Azure in the latest quarter which, while small, provides some form of baseline in the early stages of the race. AWS is well equipped and the largest cloud computing company, but it will need to demonstrate its leadership in being able to serve the AI needs of customers if it wants to maintain it.
Elsewhere, ecommerce sales have fallen for two consecutive quarters but are seen rebounding this time around, with analysts predicting 2.9% year-on-year growth. The outlook here for the third quarter has already been flattered by news that its recent Prime Day sales event was the biggest on record, and comparatives are starting to iron-out after a volatile few years.
Its small but fast-growing advertising business is forecast to report a 16.4% rise in sales, which has also slowed down lately but remains a welcome result when you consider the challenging conditions being faced by behemoths such as Meta and Alphabet. Growth from its subscription business remains stable as consumers continue to assign value to Prime and its other services.
The outlook is becoming rosier for Amazon as we enter deeper into the second half, with Wall Street anticipating an acceleration in sales and predicting operating profits will more than double compared to last year. However, the uncertain economic outlook poses a threat. JPMorgan CEO Jamie Dimon has predicted that consumers will exhaust whatever savings they put away during the pandemic by the end of 2023, and US students will also see their situation change drastically when loan repayments restart in just a matter of weeks. That paints a challenging picture for consumer spending.
Amazon is trading less than half the peaks we saw in 2021 despite being a much larger and more profitable business today, simply because the growth outlook has weakened. However, it is important to contextualise the ups and downs we have seen in recent years. Annual sales in 2023 are forecast to be double what we saw in 2019 and operating profit has risen about 50% in four years. Its delivering far more packages than it was back in 2019, serving around 50 million more subscribers, AWS has grown 2.5-fold, and its newer advertising business is showing real momentum and delivering rapid growth.
That suggests there is plenty of room for shares to keep up the momentum, especially as its valuation is still tied far more to growth prospects rather than profitability. Amazon continues to boast a large premium over smaller rivals and its Big Tech peers because of that focus on growth, but its multiple sits far below what we saw before or during the pandemic. But growth will be dictated by economic conditions and the outlook remains clouded as markets debate over what sort of landing – hard, soft or somewhere in-between – the Federal Reserve can deliver.
Where next for AMZN stock?
Amazon shares have taken a breather since rallying to a 10-month high, having struggled to break above the 50% retracement. A sustained move above $135 is needed to set new highs, although its initial job is to move back into the upper chamber of the parallel channel that has contained the rise in Amazon shares over the past five months.
The 52 brokers that cover the stock currently have an average target price of $144.28 on Amazon, according to a consensus from Refinitiv.
On the downside, we can see Amazon shares are under pressure along with the wider market in premarket trade this morning as markets are rattled by a surprise downgrade to the US credit rating. The stock could slip to $126, the trough hit exactly one-week ago. We can see a pinbar formed to suggest that is the price needed to attract buyers back into the market and the 50-day moving average is also aligning with this level and the supportive trendline.
Nasdaq 100 analysis: Where next?
Amazon is the third largest member of the Nasdaq 100 and accounts for over 5% of the index, so the results will influence how the index performs.
Nasdaq 100 futures are down 1.2% as that surprise US credit downgrade rattles the markets and the index is set to test the middle of the parallel channel that has been in play since March. It would need to close above 15,600 in order to hold above this level of support. A slip below here could see the 78.6% retracement provide a safety net, as it has done during the last three weeks.
All three moving averages are on the rise and the RSI suggests there is further upside potential. Surpassing the psychologic level of 16,000 is the next target before it can look to test the upper trendline of the channel.
AAPL stock: Keep an eye on Apple earnings
Importantly, Big Tech rival Apple – the single largest member of the Nasdaq 100 index with an 11.6% weighting - also reports on Thursday. That means it will be a big day for the index considering two of the three largest players are reporting. You can find out everything you need to know ahead of the Apple results in our Apple Q3 Earnings Preview.
Take advantage of extended hours trading
Amazon (and Apple) will release earnings after markets close and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.
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