Amazon Earnings: What Analysts Expect and Why They're Bullish

As Amazon (AMZN) prepares to report its third-quarter earnings after the market closes on Thursday, investors are eager to see how the e-commerce giant performed during the crucial holiday shopping season. Analysts have been busy updating their estimates and sharing their thoughts on the company's prospects. Let's dive into what they expect and why they remain bullish on Amazon stock.



Revenue and Earnings Expectations

Analysts expect Amazon's third-quarter revenue to come in at $157.27 billion, up from the prior quarter and year-ago period. However, profits are projected to fall sequentially to $12.38 billion as expenses climb, despite rising roughly 25% year-over-year. This decline in earnings is primarily due to increased labor costs and higher spending on artificial intelligence (AI) initiatives.

Key Metrics: AWS and Advertising Revenue

Amazon Web Services (AWS) and the company's growing advertising business have been key sources of revenue growth so far this year. A migration to cloud storage and growing use of AI products have helped boost AWS revenue. Jefferies analysts recently reported seeing growing AWS revenue in the third quarter. The analysts also noted solid and improving demand for ad spending with Amazon, with nearly all advertisers surveyed planning to increase their budget for Amazon ads at some point this year.

Returns on AI Spending

A number of big tech companies, including Amazon, face pressure from investors to show that their spending on AI is paying off. Amazon CEO Andy Jassy said in the company's first-quarter earnings call that it wouldn't be spending so much on AI if it didn't see very clear signals that Amazon could monetize it. JPMorgan analysts told clients earlier this month that it will be important for Amazon, along with other tech giants, to highlight their early returns on AI spending in their earnings calls.

Concerns and Uncertainties

While analysts remain bullish on Amazon's prospects, there are some concerns and uncertainties surrounding the company's earnings report and its potential impact on the stock price. These include:

1. Consumer Weakness and Growing Labor Costs: Analysts are concerned about the potential impact of consumer weakness on Amazon's sales, as well as the increasing labor costs associated with maintaining its vast workforce. These factors could squeeze Amazon's profit margins and negatively impact earnings.
2. Higher Spending on Artificial Intelligence: Amazon has been investing heavily in artificial intelligence, which could lead to higher expenses and potentially impact earnings. Analysts will be watching to see if these investments are paying off and if the company can maintain its growth trajectory.
3. AWS Margin Concerns: While AWS has been a significant driver of growth, there are concerns that its margins may be topping out. The expected AWS margin for Q4 is 35.3%, down from 38.1% in the previous quarter. The wide range of estimates for the Q4 AWS margin, from 30% to 39%, reflects the uncertainty among analysts about the sustainability of AWS's high margins.
4. North American Operating Margin: The North American operating margin has increased significantly from 1.1% at the beginning of last year to an estimated 6.7% for Q4 2024. However, there is a wide range of estimates for the Q4 margin, from 4.0% to 7.8%, indicating uncertainty about the outlook for the North American online retail business.
5. Impact of AI on Core Business: There have been questions emerging about the impact of AI on Alphabet's core business, which could potentially affect Amazon as well. However, these concerns have not yet impacted consensus revenue estimates for Q4 or 2025.



In conclusion, analysts expect Amazon's third-quarter earnings to show strong revenue growth, driven by its AWS and advertising businesses. However, they also anticipate a decline in earnings due to increased expenses. Despite these concerns, analysts remain bullish on Amazon stock, citing the company's strong fundamentals and growth prospects. As investors await Amazon's earnings report, they should keep an eye on the key metrics and uncertainties discussed above, as well as any updates on the company's AI initiatives and the rollout of ads on Prime Video.