Amazon revenue to swell again but aggressive expansion to knock profits in Q3 – Stock Market News is set to report its third quarter financial results on Thursday, October 27, after Wall Street’s closing bell, rounding up a busy week for tech earnings. Its stock has been somewhat of a laggard this year as Wall Street has come under attack on multiple fronts. The biggest headwind has been runaway inflation and the Fed’s brute-force attack on it. Thus, with a recession looking more and more likely, Amazon’s earnings will be an important gauge not just on how well the e-commerce giant is weathering the economic storm but also on how the US consumer is holding up.

Revenue growth to pick up after pandemic hangover

Like most online-focused companies during the pandemic, Amazon enjoyed a sales boom in 2020. That boom continued into the first half of 2021. But as the bonfire of monetary and fiscal stimulus fizzled out in the second half, so did the exponential growth in revenue. Nevertheless, the company has been able to maintain a respectable pace of revenue growth over the last year, thanks to the strong performance of its cloud unit as well as the rising share of income from digital advertising and subscription services.

The cloud business - Amazon Web Services (AWS) – will likely see revenue rising by at least 30% year-on-year, while advertising revenue is expected to jump by more than 35% y/y. But the third quarter was likely a good one for its core e-commerce unit too following the company’s most successful Prime Day event ever in July, which should make up for the poor Q2.

Total revenue for the quarter is therefore expected to come in at $127.66 billion according to IBES estimates by Refinitiv, representing an annual increase of 15.2%. This compares with $121.23 billion in Q2 when yearly growth slowed to 7.2%.

A murky outlook

However, the expected bounce in the retail business in Q3 might not last very long. Amazon decided to hold a second Prime Day event in October, calling it Prime Early Access. However, sales were reportedly lower than the July event and the contribution to Q4 revenue will become clearer after the Black Friday sale, as it’s likely many customers simply brought forward their holiday shopping.

Even if the Early Access sale provides an incremental boost to Q4 earnings, the 2022 holiday season will still be a tough trading period amidst the squeeze on consumers from higher energy bills and soaring prices. If predictions about a recession in America next year materialize, the outlook for the retail segment is quite bleak.

Higher spending and costs have hit profits

Making matters worse is the increased competition from the likes of Walmart even as Amazon struggles with spiralling costs. The company has been feeling the pressure from higher wages lately, being forced to offer higher wage deals to settle labour disputes as well as to retain staff amid shortages. Surging shipping costs and ongoing supply issues are also weighing on the retailer.

However, the retail business has always been operating with razor-thin margins and Amazon’s biggest source of profit for some time now has been AWS. On the face of it, this is not immediately visible, especially since Q1 this year when the company slipped into losses. Profitability is expected to have improved in the third quarter, with a net income estimate of $2.3 billion versus a $2.0 billion loss in the prior quarter, although this would still be down about 27% from a year ago. In terms of earnings per share (EPS), it’s estimated at $0.22 for the period.

But the drag from the e-commerce operations doesn’t completely justify the weak EPS performance relative to the stellar revenue growth and this discrepancy is better explained by Amazon’s recent investment splurge. The company has been busy lately investing heavily in new cloud infrastructure. Investors have long been optimistic about AWS’ longer-term prospects, believing it has the edge over the competition, not to mention being the most profitable. Even now with AWS at the top of its field, the latest round of heavy spending could accelerate its growth much further in the future.

The most expensive tech stock

The question is though, does this make a strong enough case for Amazon’s exorbitant valuation. The stock has lost more than 30% of its value this year and is down about 38% from its all-time high of $188.65 reached in July 2021. Yet, compared to its peers, it’s by far the most expensive with a trailing price/earnings (PE) ratio of about 160. Its forward multiples aren’t much better and still way above those of other tech behemoths.

But analysts remain bullish about Amazon, maintaining their ‘buy’ recommendation and assigning a median price target of $170.00. That’s a level last brushed in March 2022 and the share price has since fallen significantly. If the earnings results don’t disappoint and the company’s guidance for Q4 impresses, the stock might be able to rally towards its 50-day moving average (MA) in the $125 region. Strong gains could extend any rebound towards the August peak of $146.57.

Can the stock hold above $100?

However, if Amazon’s results don’t reach the bar set by investors and its guidance isn’t very encouraging either, the stock could fall back towards the recent low of $105.35. In the worst case scenario, the price could breach $100, after which the $90.55 and $84 levels would come into scope, which correspond with the 123.6% and 138.2% Fibonacci extensions of the May-August uptrend.

As a general note, Amazon’s preference to focus on expansion and diversification rather than prioritizing profits is nothing new and this approach has worked in the past in catapulting the share price higher. But as financial conditions tighten and investors are forced to become pickier, Amazon might struggle to sustain its current valuation without having more to show for it.

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