Amazon Earnings On Deck: Will It Top Or Flop?

In the second and third quarter, Amazon.com, Inc.’s (NASDAQ:AMZN) revenues topped estimates but the bottom line fell short of expectations. Against this backdrop, it’s not surprising that the company’s shares underperformed the S&P 500’s return of 31.5% despite gaining 23% last year. The e-commerce giant will report fourth-quarter earnings results on Jan 30, after the market close. Let’s take a look —

Revenue Growth: Accelerating or Decelerating?

After increasing for a stretch, Amazon’s sales have shown signs of deceleration. In the third quarter, the company’s net sales advanced 24% to $70 billion but still declined from 29% growth registered in the preceding quarter. Investors are thus concerned that Amazon’s best growth days might be over.

However, the company has steadily increased its international exposure, especially in the fourth quarter, to countries like Turkey, Australia, Mexico, Brazil and India. Reflective of this, international sales figures are likely to improve. Moreover, in order to put a check on the slowdown in revenue growth, the company adjusted the mix of products offered for two-day shipping, increased quantities and eliminated needless packaging. Overall, the management expects the company’s net sales between $80 billion and $86.5 billion, indicating year-over-year growth of 16% at the midpoint.

But mostly due to the announcement of “record-breaking” holiday results on Dec 26, Amazon is expected to see an improvement in fourth-quarter revenue growth. Almost 5 million Amazon Prime members were added in a single week, and the company’s shipping service nearly quadrupled the delivery of the same-day and next-day packages.

At the same time, the biggest contributor to Amazon’s success is its cloud computing business, Amazon Web Services (“AWS”). AWS offers cloud services to corporations and individuals for operating websites, databases and other programs.

And with the constant digital transformation drive, AWS is poised to be an industry leader and is well poised to counter intense competition from Microsoft Corporation’s (NASDAQ:MSFT) Azure. Lest we forget, the e-commerce behemoth did suffer a setback when the U.S. Department of Defense awarded a $10-billion Joint Enterprise Defense Infrastructure, or JEDI, cloud contract to Microsoft and not Amazon. Nonetheless, investors expect more than 30% growth in AWS for the fourth quarter.

What About Operating Margins?

Last year, Amazon announced one-day delivery options for an array of products instead of the staple two-day. But the downside to such a move is additional costs.

Thus, the company’s operating income is going to take a hit as it continues to spend on improving Amazon Prime’s core free delivery benefits. Amazon has spent an estimated $1.5 billion on one-day Prime shipping. For the fourth quarter, Amazon expects operating income between $1.2 billion and $2.9 billion, suggesting a decline of 24% to 68% from the same period a year ago.

Here’s What to Expect

As the cloud computing market remains extremely profitable, and Amazon is painting a rosy picture of the holiday season, the company’s revenues will surely improve in the fourth quarter. Total revenues are thus projected to come in at $86 billion for the fourth quarter, suggesting an 18.8% rise from a year ago.

However, the company’s initiative to upgrade Amazon Prime’s core free delivery service might squeeze operating margin. Naturally, analysts widely expect a 34.1% year-over-year decline in Amazon’s profits for the fourth quarter.

But still the Zacks Rank #3 (Hold) company is expected to beat the consensus for earnings. After all, the company has an Earnings ESP of +10.23%. This is Zacks’ proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Amazon.com, Inc. Price and EPS Surprise

Amazon.com, Inc. price-eps-surprise | Amazon.com, Inc. Quote

Breakout Biotech Stocks with Triple-Digit Profit Potential

The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.

Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.

See these 7 breakthrough stocks now>>