Amazon’s Earnings: Sales Growth And Operating Expenses In Focus

Amazon (NASDAQ:AMZN) is due to report its earnings from Q3 on 25th October, having finished the second quarter on a mixed note with revenues growing 29% to $13 billion approximately while trailing 12 month free cash flow decreased by 40% to $1.1 billion. The North America segment led the revenue growth with a jump of 36% while the international segment followed with at 22%. Operating income dipped from almost 4% of total sales during the same period last year to slightly less than 3% of total sales.

In the earnings call, we will be watching closely how Amazon plans to extend its lead in the Electronic and General Merchandise and cloud computing markets. We will also look for any announcements regarding the performance of the new Kindle Fire device range which was launched in early September. Amazon competes primarily with leading retailer Wal-Mart (NYSE:WMT), consumer electronics giant Best Buy (NYSE:BBY) and eBay (NASDAQ:EBAY) Marketplaces in the Electronics and General Merchandise market, Apple (NASDAQ:AAPL) in the device market, and Netflix (NASDAQ:NFLX) and Barnes and Noble (NYSE:BKS) in the content market.

Check out our complete analysis of Amazon

Electronics and General Merchandise

Amazon’s electronic and general merchandise sales grew almost 40% year over year to $8 billion in Q2 and contributed 64% of overall sales. The growth was driven by the North American business where revenues grew by 41% to almost $5 billion. The company’s primary competitor in the market, Best Buy and Wal-Mart, have been aggressively promoting price matching and same day delivery services to counter Amazon’s threat and recently started using QR codes to prevent their stores from being used as showrooms by customers to check out goods before making a purchase online. We’d be looking for any effects of these initiatives on the sales from the segment.

Cloud and Other Web Services

Amazon Web Services is the market leader in cloud computing, but cloud and web services still account for just a fraction of the company’s total revenues. The company launched a marketplace to trade excess cloud computing capacities during the quarter. It also launched Amazon Glacier, a low cost data storage solution aimed at data archiving and backup. We expect both the services to positively impact the earnings from cloud services. Also, we’ll be watching closely for any hints related to its growth strategy in the cloud computing market where its position has been threatened by Oracle‘s (NASDAQ:ORCL) entry into the market as an IaaS provider. 

Overhead Threatens Margins

The worldwide operating margins of the company dropped to almost 3% of the revenues during Q2. We expect that higher administration costs ahead of the holiday season on account of hiring of temporary personnel, content acquisition costs for its video streaming services and growing capital expenditure as the company sets up new warehouses to result in a further drop in the margins during the quarter.

We have a $222 estimate for Amazon which is 10% below the current market price.

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