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Amazon is set to unveil its earnings for the third quarter of this year after the market closes on Thursday. The outlook appears promising, with a focus on several key factors:
Factors Driving Amazon’s Quarter
- Recovery in Online Stores Business: The quarter’s success is expected to be driven by the continued recovery in Amazon’s flagship online stores business.
- AWS Growth: A critical element will be the anticipated rebound in the growth rate of Amazon Web Services (AWS), the company’s cloud computing division, which has seen a slowdown in growth over the past six quarters. The decline is attributed to cloud customers seeking to optimize their cloud spending and maximize value from their cloud investments. AWS growth is expected to accelerate as corporate budgets expand, and demand for AI workloads grows.
- Advertising Revenue: Amazon’s advertising arm is expected to maintain its strength, contributing to the company’s overall performance.
Anticipated AWS Rebound
AWS growth has faced challenges, with a decrease to 12.2% in the June quarter from 39.5% at the end of 2021. Analysts expect a 12.9% improvement in AWS revenue to $23.2 billion, marking the first sequential increase in growth since 2021. This resurgence aligns with the broader trend of cloud service providers.
Microsoft recently reported better-than-expected growth in its Azure cloud business, although Google’s cloud business missed Street expectations for the quarter.
Earnings and Revenue Estimates
For the September quarter, analysts’ consensus forecasts indicate that Amazon will report sales of $141.5 billion, reflecting an 11% increase from the previous year. Earnings are expected to reach 58 cents per share, compared to 28 cents in the same quarter of the previous year.
Key estimates for this quarter include a 6.5% growth in online stores business to $57 billion, a 16.7% increase in third-party seller services revenue to $33.4 billion, a 13.5% growth in subscription services to $10.1 billion, and a 21.6% rise in ad revenue to $11.6 billion.
Analyst Insights
Analyst Justin Post from BofA Global Research highlights that the growth rate at AWS is a key focus area for the market. He projects a 12.5% growth for AWS, and notes that any number around 11% would likely trigger selling, while a figure above 13% could boost the stock’s performance.
Post also observes that aggregated credit and debit card data suggests online spending increased by 1% year-on-year in the quarter, indicating a two-point acceleration compared to the previous quarter. Additionally, ad spending checks have shown positive trends.
Future Outlook
For the upcoming December quarter, Street estimates suggest revenue of $167.2 billion, with operating income reaching $8.7 billion. Post’s projections are higher, with estimates of $169.3 billion and $9.5 billion, respectively. Looking ahead, Post identifies two key factors for Amazon in 2024: the acceleration of AWS growth into the high teens and an improvement in North American retail margin to the 5% range.
He cites potential retail upside driven by logistics efficiency, advertising, fee increases, and easing comparisons, while he expects AWS to accelerate in Q4 with further growth in Q1 2024 due to an easing optimization cycle and increased demand for AI.
Amazon shares have already gained 44% year-to-date, demonstrating strong investor confidence in the company’s performance.
