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The Q3 earnings season is heating up, as Microsoft (MSFT) and Alphabet (GOOG) will report their quarterly results after the bell today, while Meta Platforms (META) will step into the Q3 confessional tomorrow. As for their mega-cap peer Amazon (AMZN), it's set to release earnings this Thursday, Oct. 26.
Amazon stock soared after its Q2 report, and its post-earnings performance stood out among FAANG stocks. Here's a look at Wall Street’s expectations for the e-commerce giant’s latest earnings, plus 5 key things that investors should would watch for in the report.
Amazon Q3 Earnings Preview
Wall Street analysts expect Amazon to report revenues of $141.6 billion in Q3 – a YoY rise of 11.4%. The company forecast Q3 revenues between $138 billion-$143 billion during the Q2 earnings call.
Amazon also provided operating income guidance of between $5.5 billion-$8.5 billion. Analysts expect the company’s Q3 per-share earnings to almost double YoY to $0.58. Notably, Amazon’s profits nosedived in 2022 amid high inflation and soaring wage costs. However - like many fellow Big Tech companies - Amazon has been on a belt-tightening spree, and has taken several actions (including mass layoffs, pausing the construction of its HQ2 in Virginia, and lowering its overhead expenses) to lift its profits.
These measures have started to show in the bottom line, and Amazon reported an operating income of $7.7 billion in Q2 – easily outpacing its previous guidance for $2 billion to $5.5 billion.
What to Watch in Amazon’s Q3 Earnings Report
While we have a flurry of earnings reports scheduled for this week, I believe Amazon’s report is especially crucial considering the company’s presence in multiple industries. Here are the 5 key things that I'll be watching when Amazon reports its Q3 earnings this week.
1. Commentary on U.S. Consumer and Q4 Guidance
I will especially be watching Amazon’s commentary on the U.S. consumer. Notably, while retailers like Macy’s (M), Target (TGT), and Dick’s Sporting Goods (DKS) provided dismal outlooks during their earnings calls in August, Amazon said the very next month that it would hire 250,000 seasonal employees this holiday season – which is a new record, and reflects optimism towards holiday shopping trends this year. Incidentally, Amazon's Prime Big Deal Days, held on Oct. 10 and 11, received a better response than the last year.
That said, economic indicators related to the health of U.S. consumers have been mixed, at best. While retail sales rose 0.7% in September – which was over twice what analysts expected – consumer confidence has fallen, reflecting financial stress among consumers.
Along with the comments on U.S. consumers, I'll also be looking for Amazon’s Q4 revenue guidance. Consensus estimates call for sales to rise 12% to $167 billion in the quarter, and better-than-expected guidance could help propel AMZN higher.
2. How Is AWS Positioned Amid the Macro Slowdown?
Before Amazon’s Q2 earnings, markets were especially interested in the “A” word - or AWS, the company's enterprise-focused Amazon Web Services (AWS). Results from the segment did not disappoint, and while AWS revenue growth slowed to 12% - the lowest since 2015, when Amazon started reporting its financials separately – it was nonetheless ahead of what Wall Street expected.
Critically, Amazon stressed during the Q2 earnings call multiple times that the AWS segment is now “stabilizing” - and while management did not provide much color on the Q3 forecast, contrary to what had been its practice for the last few quarters, CFO Brian Olsavsky said that "Q2 trends continue into July,” while adding that the company is “starting to see some good traction with our customers' new volumes.”
During Amazon's Q3 release, I would watch the AWS segment’s revenue growth for more signs that the segment is indeed stabilizing.
3. Free Cash Flow Generation
Amazon posted negative free cash flows of $11.6 billion in 2022 and $9.1 billion in 2021. The company’s free cash flow profile has since improved and the metric has risen sequentially for four consecutive quarters – enabling it to turn free cash flow positive in the trailing 12-month period ending June 30. I would closely watch Amazon’s free cash flows in Q3 as the metric is a key driver of the company’s valuation.
4. The FTC Lawsuit… and a Potential Amazon Split
The Federal Trade Commission (FTC) has filed its long-awaited antitrust lawsuit against Amazon. The regulator, along with 17 states, has accused Amazon of “illegally maintaining monopoly power” in a historic lawsuit.
A large section of the market believes that Amazon’s sum of the parts valuation could be higher than that of the combined company. During the Q3 earnings call, investors will want to watch out for any comments on whether Amazon has plans to voluntarily split its business - not only to escape regulatory scrutiny but also potentially create shareholder value.
5. Competition from Chinese E-Commerce Companies
Chinese e-commerce companies like Shein and Temu are gaining traction in the U.S. Amid inflationary pressures, consumers have been trading down, and these platforms provide cheaper alternatives shipped from China. During the Q3 earnings call, Amazon might talk about whether it has any specific plans to take on such platforms, which have become quite popular among U.S. consumers.
Wall Street Is Bullish on Amazon Heading Into Q3 Earnings
Wall Street is bullish on AMZN heading into the Q3 report. Last week, Oppenheimer analyst Jason Helfstein reiterated the stock at “overweight,” and termed it a top pick for 2024.
Overall, Wall Street considers Amazon’s stock a Strong Buy, as 35 of 40 analysts rate it as a Strong Buy, and 4 more as a Moderate Buy. The remaining 1 analyst rates it as a Hold.
The stock's median target price of $169.51 is nearly 33% higher than the current price levels. After Amazon’s Q2 report, several brokerages raised their outlook and target prices, thanks to the reassuring commentary on AWS.
After the recent fall in Amazon stock amid the broad-based market sell-off, I believe the stage is set for a nice post-earnings rally if the company can come up with a decent set of numbers.
On the date of publication, Mohit Oberoi had a position in: AMZN , META , MSFT , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
