Amazon Earnings Preview: Growth Across Segments To Help Drive Results

Amazon (NASDAQ:AMZN) is scheduled to report its fourth quarter results on February 1. The e-commerce giant has reported a strong period of growth in the last couple of years, driven by Amazon Web Services (AWS). During the September quarter, Amazon completed the Whole Foods acquisition in late August and announced a few new developments in the AWS business and the consumer business (mainly Alexa and Echo). While some of these developments in the consumer market could help drive long-term results, the company’s current growth is expected to come from existing businesses, including core e-commerce as well as AWS.

We have an $1000 price estimate for Amazon’s stock, which is below the current market price. Amazon’s stock price surged from $750 at the beginning of last year to around $1400 currently, and is up by over 20% from the beginning of the year. We have created an interactive analysis where you can change expected revenue and income margin figures to gauge how it will impact expected EPS for the quarter.

See our complete analysis for Amazon

December Quarter Guidance

In the fourth quarter, Amazon expects its overall revenue to grow around 28-38% on a y-o-y basis to around $58 billion. Better than expected profit margins and EPS in the September quarter has led to some optimism among analysts. Consequently, consensus estimates for Amazon’s earnings per share for the December quarter stand at around $1.85 per share, as compared to around $1.54 in the prior year period. Despite the increase in EPS for Q4, full year EPS is expected to be around 10% lower on a y-o-y basis to $4.30.

Key Growth Metrics

AWS revenues were up by 42% through the first three quarters of the year to $12 billion. Moreover, AWS is the only segment to report an improvement in operating profit. This trend is expected to continue in the near term, with Amazon likely to continue to reinvest AWS earnings into international expansion and new ventures.

Non-AWS revenue streams also reported strong growth. North America revenues (including e-commerce, subscription and Amazon product sales) increased by around 30% through the first three quarters of the year to $69 billion. Similarly, international revenues were up over 21% over the comparable prior year period to $36 billion.

However, the non-AWS segments saw a combined operating loss of around $1 billion, while the operating profit for AWS stood at $3 billion for the three quarters combined. Amazon has also incurred higher warehousing and shipping expenses in North America, attributable to over 30 new fulfillment centers that have opened since the beginning of 2016. This will likely keep operating margins relatively low in the near future.

Amazon’s international segment has also operated at a loss, which has worsened in recent quarters due to the company’s attempts to expand and increase its footprint in international markets. In order to achieve this, the company has had to spend considerably, with a significant portion of these operating expenses allocated towards fulfillment expenses, marketing expenses and promotion costs, which are higher than expenses in markets where the company already has a strong presence. This trend is expected to continue in the near term as the company prepares to battle international competition from the likes of Alibaba (NYSE:BABA).

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