AMZN Earnings Preview- Cloud, Advertising, and Retail in focus

Amazon is set to release its Q3 earnings on October 31, with analysts forecasting EPS of $1.14 and revenue of $157.25 billion, according to FactSet. Guidance on net income will be particularly important (Guidance is for $11.5-15.0 bln), especially as analysts expect AWS (Amazon Web Services) to see year-over-year growth of 20%, which could significantly impact profitability. The report will also be closely scrutinized for insights into Amazon's core retail segment, AWS performance, and growth in the advertising business.

In the cloud segment, AWS growth is a focal point, with a 20% increase anticipated by BMO. This growth is attributed to optimization normalization, ongoing adoption of Amazon’s Bedrock AI, and expansion in cloud services. Analysts believe that the strength of AWS, which is crucial to Amazon’s margin profile, will continue to anchor its valuation and justify current investment levels.

Retail operations are another key area of focus, with Stifel analysts optimistic about e-commerce growth, citing stronger-than-expected Q3 U.S. retail sales and a potential for further improvement in Q4. However, concerns over possible competition from Walmart in third-party seller services and pricing pressures could weigh on Amazon’s marketplace margins, as noted by OPCO analysts.

Advertising is poised for continued growth, with analysts expecting Amazon to exceed its 2025 ad-supported Prime Video revenue target of $1.8 billion. This is driven by an increasing ad load and a limited number of Prime subscribers opting for ad-free versions, signaling a robust demand for ad-supported content. JMP estimates that advertising revenue could reach $68 billion by 2025, driven largely by Prime Video.

In terms of guidance, Cantor analysts anticipate Q4 revenue and EBIT outlooks could be slightly below street forecasts due to seasonal factors, margin pressures, and investments in projects like Kuiper, Amazon’s satellite internet initiative. This conservative outlook may temper immediate share price appreciation but reflects Amazon’s ongoing efforts to enhance delivery capabilities and infrastructure.

Amazon’s substantial investments in infrastructure, including new fulfillment centers and increased delivery stations, underscore its commitment to reducing delivery times and enhancing customer experience. DA Davidson highlights Amazon's focus on smaller, sortable fulfillment centers to improve same-day shipping and cut costs, indicating a strategic focus on regional efficiency and automation.

Overall, analysts express mixed views on Amazon’s near-term stock performance, with Wells downgrading the stock from Overweight to Equal Weight due to challenges in the positive revision story and rising competition from Walmart. Despite these headwinds, Amazon remains a top pick for firms like UBS and RBC, who are optimistic about its long-term growth trajectory driven by AWS, e-commerce, and advertising.

In Q2, Amazon reported revenue of $147.98 billion, which represented a 10% year-over-year growth but slightly missed consensus estimates of $148.78 billion, driven by lower-than-expected retail sales in North America and International segments. AWS, Amazon's cloud segment, continued to be a standout, posting 19% growth and exceeding the estimate of $25.98 billion with $26.28 billion in revenue, which provided a positive offset to the softer retail results. Notably, Amazon’s EPS came in at $1.26, significantly above the expected $1.04, reflecting a strong operating income boost of $14.67 billion, up 91% from the prior year.

The AWS segment’s performance and accelerating growth trajectory were attributed to increasing cloud migration and investments in generative AI, where Amazon has leveraged partnerships with NVIDIA and its custom silicon development to address cost-effective AI needs. Analysts noted the growing relevance of AI in AWS and anticipate this trend to be a key long-term driver for Amazon’s growth, supporting its aggressive capital expenditures and infrastructure expansions. The AWS results stand out in a competitive cloud market, indicating Amazon’s positioning to benefit from businesses’ renewed focus on cloud-based modernization.

Retail margins showed improvement, with North America’s operating margin rising to 5.6% from 3.9% a year ago, reflecting Amazon’s focus on cost efficiencies such as improved delivery speeds and enhanced fulfillment processes. The company highlighted ongoing efforts to enhance delivery speed for Prime members, integrate more automation robotics, and reduce costs through strategies like carton consolidation and same-day facility expansions. These optimizations are expected to support Amazon’s margin stability, especially as the company gears up for the holiday season with higher retail demand and potential growth in its core e-commerce segment.

Amazon’s advertising segment also demonstrated growth potential, albeit slower than anticipated, with revenue showing resilience despite challenges. Analysts remain optimistic about the longer-term growth in advertising revenue, particularly from ad-supported Prime Video and enhancements on Amazon’s retail platforms. Additionally, the advertising division’s contribution to overall profitability continues to grow, providing Amazon with another high-margin revenue stream that could counterbalance some retail volatility.

Amazon’s Q2 results underscored strength in AWS, retail margin improvements, and the strategic focus on AI as key drivers for future growth. Despite near-term challenges such as rising fulfillment expenses and cautious consumer trends in retail, analysts maintain a positive outlook for Amazon, with some projecting price targets as high as $251 based on strong EBIT performance and anticipated multiple expansions.

In summary, Amazon's Q3 earnings are expected to highlight robust growth in AWS and advertising, steady e-commerce performance, and strategic investments in infrastructure and AI. However, potential challenges in Q4 guidance and competitive pressures could impact short-term momentum, making this a closely watched report.