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This week, both Apple (AAPL) and Amazon (AMZN) are scheduled to release their quarterly earnings and wrap up the reporting season for FAANG stocks. With a year-to-date gain of 57%, Amazon is outperforming the tech-heavy Nasdaq Composite ($NASX) in 2023, and is the second-best performing FAANG stock of the year – trailing only Meta Platforms (META) which has soared a whopping 167% this year amid its focus on “efficiency.”
While Amazon stock is outperforming this year, it shed almost half of its value in 2022. The stock underperformed its tech peers in 2021, as well, and barely finished that year in the green - lagging the broader market by a wide margin.
Amazon to Report Q2 Earnings on Thursday
Amazon is scheduled to report its Q2 earnings after the close this Thursday, Aug. 3. Analysts expect the Seattle-based company to post revenues of $131.4 billion for the period, up 8.3% year-over-year and within the $127 billion-$133 billion guidance range provided with Amazon's Q1 earnings release.
Ahead of the report, analysts expect Amazon’s earnings per share (EPS) to rise 240% to $0.34 in the quarter. The company does not provide EPS guidance - but during the Q1 earnings call, Amazon forecast Q2 operating income between $2 billion and $5.5 billion, compared to $3.3 billion in the second quarter of 2022.
Beyond these headline numbers, investors should watch for several other key metrics in Amazon’s upcoming earnings release.
AWS, Ad Results in Focus
Investors should watch the revenue growth and margins of Amazon's North America segment for signs of continued improvement. In Q1 2023, the segment’s revenues rose 11% while operating income came in at $0.9 billion, compared to an operating loss of $1.6 billion in the first quarter of 2022.
The enterprise-focused Amazon Web Services (AWS) business in particular is one to watch, as revenue growth for the segment fell to an all-time low of 16% in the first quarter. The cloud segment was previously a key driver of Amazon’s profitability and cash flows; last year, only AWS posted an operating profit, while both the North America and International segments posted an operating loss.
In fact, Amazon stock fell after its Q1 2023 earnings release, as management's commentary on the lucrative AWS cloud business overshadowed the company's earnings beat.
As a point of comparison, competitor Alphabet (GOOG) reported a 28% rise in its cloud revenues for the second quarter, while Microsoft (MSFT) said that Azure cloud revenues rose 26% YoY over the period.
Elsewhere, Amazon said its 2023 Prime Day, held earlier in July, was its biggest ever. During the earnings call, the online retailer might comment on whether it is looking to host a second Prime Day in 2023 to bolster results, as in 2022.
Investors should also watch the performance of Amazon's advertising business, which generated revenues of $9.5 billion in Q1 2023 – 21% higher than the corresponding period last year. The segment has performed well, despite the overall slowdown in the digital ad market.
What to Watch on the Conference Call
Investors should also tune in for updates to Amazon’s guidance, especially on that crucial AWS segment.
During the Q1 2023 earnings call, Amazon’s CFO Brian Olsavsky said, “customers continue to evaluate ways to optimize their cloud spending in response to these tough economic conditions in the first quarter.” When the company reports Q2 results later this week, investors should look for any change in tone or additional insights into how AWS customers are budgeting for the cloud amid a challenging environment for corporate spending.
During the earnings call, AMZN might also talk about its artificial intelligence (AI) initiatives. The company is looking to increase delivery speeds and cut logistics costs by implementing AI, and is reportedly looking to add generative AI features to the shopping platform. Plus, a leaked email suggests Amazon has also formed a new internal team focused on AI, reporting directly to CEO Andy Jassy.
Finally, in response to slower revenue growth, many large-cap U.S. tech companies have resorted to aggressive cost cuts to boost their earnings, and Amazon is no exception. The company has already taken several steps to lower expenses - like pausing the construction of its HQ2 in Virginia, and cutting 27,000 corporate jobs. If Amazon provides more insights into its cost-cutting efforts on the earnings call, it could be a positive catalyst.
Wall Street Analysts are Bullish on Amazon
Ahead of its quarterly results, Wall Street analysts are bullish on Amazon stock, and most rate it a Strong Buy.
Of the 36 analysts that cover AMZN, 31 rate it a Strong Buy, 4 a Moderate Buy, and 1 a Hold. None of the analysts has a Sell rating on Amazon, and its mean target price of $147.14 is 10% above current stock prices.
Ahead of this week's earnings release, Evercore ISI maintained its overweight rating on the stock, and referred to AWS revenue growth as the “A-word” that could unleash value in AMZN. The brokerage has listed AMZN as one of its top Large Cap picks.
Bank of America (BAC) is also bullish on AMZN heading into earnings, and believes that improvement in retail margins and AWS growth would support an expansion of the stock’s multiples.
The ball is in Amazon's court as it prepares to release Q2 earnings later this week and wrap up what has been a mixed earnings season for FAANG shares so far. After a tough first quarter for the segment, don't be surprised if it's those AWS results, specifically, that drive the stock's direction immediately after earnings.
On the date of publication, Mohit Oberoi had a position in: AMZN , AAPL , MSFT , GOOG . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
