Amazon Q2 Earnings Preview: AWS, Advertising, Third-Party Sales & Prime

Shares of Amazon (NASDAQ:AMZN) have climbed over 32% in 2019 to easily outpace the S&P 500’s 18% jump. Despite the e-commerce powerhouse’s impressive start to the year, all eyes will be on Amazon’s second-quarter 2019 earnings results that are due out after the closing bell Thursday.

Along with simple top and bottom-line estimates, investors need to know what to expect from Amazon’s individual business units, including cloud, third-party seller revenue, advertising, Prime, and more.

The Quick Overview

No long preamble is needed for Amazon. Nonetheless, a quick refresher never hurts. Prime has amassed over 100 million users who pay $12.99 per month for retail deals and delivery perks. The e-commerce giant has forced the likes of Walmart (NYSE:WMT) and everyone else to adapt, or fall to the wayside. Jeff Bezos’ firm has also expanded its streaming TV business, which is part of Prime, in order to take on Netflix (NASDAQ:NFLX) and eventually Disney (NYSE:DIS) , Apple (NASDAQ:AAPL) , and others.

Amazon has also ramped up its pharmaceutical offerings and rolled out a larger logistics push. Yet, Wall Street might look to four specific businesses that have become more important in recent years. We will dive into those right after we check out what to expect from earnings and revenue.

Q2 Outlook

Amazon’s adjusted Q2 earnings are projected to pop 4.3% from the year-ago period to reach $5.29 per share, based on our current Zacks Consensus Estimates. Meanwhile, the firm’s revenue is projected to jump 18.3% to reach $62.57 billion. This would top last quarter’s 17% top-line expansion, but mark a significant slowdown from the growth many had come to expect from Amazon for years.

Therefore, with the company’s days of 30% to 40% top-line growth seemingly behind it, at least for now, investors need to pay attention to the details more than ever. We will start with what to expect from Amazon Web Services, its industry-leading cloud computing business, with the help of our Key Company Metrics.

AWS

Amazon’s higher-margin AWS unit has propelled AMZN stock to news highs for years, as it helps enable the company to expand into other areas. Amazon’s head start in the cloud space has helped it stand out against rivals such as Microsoft (NASDAQ:MSFT) .

Last quarter, AWS revenue jumped 41% from $5.442 billion in Q1 2018 to $7.696 billion. This marked the continuation of 40% or higher growth in the key unit, but is was slower than AWS’s 47% average growth between Q4 2017 through Q4 2018. With this in mind, Amazon’s cloud segment is projected to reach $8.489 billion in the second quarter based on our estimates, up roughly 39% from Q2 2018’s $6.105 billion.

Third-Party Seller

Amazon’s third-party seller business, which includes “commissions and any related fulfillment and shipping fees, and other third-party seller services,” has grown much faster recently than its own online retail sales. The segment is projected to climb roughly 23% from $9.702 to hit $11.979 billion in Q2, which would match Q1 2019’s expansion. But investors should note that both of these rates mark a slowdown compared to the 34.6% average jump from Q4 2017 through Q4 2018.

Prime/Subscription

Amazon’s subscription services business is another segment to pay close attention to. The unit features annual and monthly fees associated with Amazon Prime memberships, along with digital music, audiobook and other non-AWS subscription services.

Segment revenues are expected to jump from $3.408 billion in the year-ago period to $4.602 billion, which would mark 35% growth. Last quarter, subscription revenue jumped 42% and it had climbed by 47% over the trailing five periods.

Other

The last thing we will look at today is Amazon’s “other” division, which “primarily includes sales of advertising services.” This segment has become more important as Amazon’s position as a go-to hub for shopping and entertainment has helped it become the third-largest digital advertiser in the U.S., behind only Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) .

According to eMarketer, Amazon is projected to pull in 8.8% of digital ad revenue in the U.S. this year, up from 6.8% in 2018—Google and FB are set to combine for roughly 60%.

AMZN’s ad-heavy “other” unit is expected to climb around 32% from $2.194 billion in Q2 2018 to $2.904 billion this quarter. This would fall just below last quarter’s 34% expansion.

Bottom Line

Amazon’s revenue growth is clearly expected to slow. But the company has crushed its quarterly earnings estimates recently, with a 60% average positive surprise over the trailing four periods. Plus, AMZN’s recent upward earnings estimate revision activity helps it earn a Zacks Rank #2 (Buy) at the moment.

AMZN is scheduled to release its Q2 financial results after the closing bell on Thursday, July 25. Make sure to head back to Zacks for a complete rundown of what actually happened.

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