Earnings Preview: Will Amazon's Cloud and Ad Segments Drive Another Quarterly Success?

Amazon is set to release its Q3 2024 earnings on October 31 after the market closes, with consensus estimates pointing to EPS of $1.14 and revenue of $157.25 billion. Analysts are focused on how Amazon's retail, cloud, and advertising segments perform, especially as the company navigates consumer spending shifts and competitive pressures in e-commerce. AWS remains a critical driver, with analysts hoping to see continued growth acceleration after a strong Q2. Investors will be looking closely at Amazon's guidance for Q4, particularly as seasonal headwinds and ongoing capex for AI and fulfillment infrastructure could impact margins.

On the positive side, AWS growth is expected to show resilience, with many analysts projecting it to exceed 20% year-over-year as cloud migration and AI-driven initiatives support demand. Amazon's partnership with NVIDIA and investments in custom silicon aim to deliver enhanced performance and cost efficiency, which could bolster AWS's competitive positioning.  AWS's recovery trajectory should remain intact, especially as more businesses complete cloud optimization and return to spending on modernization. There is a potential for AWS to reaccelerate as supply chain constraints ease, setting the stage for a positive longer-term outlook.

Amazon's advertising business, a high-margin segment that now rivals Google and Meta, is another key growth driver. Analysts expect advertising to contribute meaningfully in Q3, particularly as Prime Video introduces more ad-supported content and ad optimization tools on retail sites. There is an upside in Amazon's advertising revenue, with the potential for ad-supported Prime Video to reach $3.6 billion by 2025. This growth supports Amazon's ongoing focus on profitability improvements across the retail and cloud businesses, and successful ad performance could help offset some of the anticipated seasonal softness in retail margins.

However, challenges remain for Amazon, especially in the retail segment. Investors express concerns over softening consumer demand, particularly for discretionary items, which could impact top-line growth. Rising labor and logistics costs, compounded by Amazon's infrastructure expansion, may place pressure on retail margins. While Amazon's initiatives in automation and robotics are expected to mitigate labor expenses over time, near-term impacts from increased wages and fulfillment investments remain a concern.

Amazon's capex continues to draw scrutiny as AI and Project Kuiper investments intensify. Kuiper, Amazon's satellite internet project, is expected to incur significant expenses in the coming quarters. With AWS already accounting for substantial capex, analysts are cautious about the added costs from Kuiper, which could weigh on free cash flow and short-term profitability. While long-term potential is promising, the capex cycle may impact investor sentiment if margin expansion does not materialize as anticipated.

Amazon's Q1 earnings report delivered mixed results, with some key metrics falling short of expectations, while others surprised positively. Net sales reached $147.98 billion, up 10% year-over-year but slightly below the $148.78 billion estimate. Online and physical store sales, as well as third-party seller services, saw modest year-over-year growth but missed analyst expectations. However, Amazon Web Services (AWS) exceeded forecasts with net sales of $26.28 billion, up 19% year-over-year, highlighting the continued demand for cloud solutions. EPS also impressed at $1.26, beating the $1.04 forecast, driven by better-than-expected operating income of $14.67 billion, which rose 91% year-over-year.

Analysts were encouraged by AWS's strength and its growth outlook, especially as the cloud segment has completed its cost optimization efforts and is refocusing on infrastructure modernization and AI capabilities. Amazon's strategic investments in custom silicon and its partnerships with NVIDIA reflect its commitment to enhancing AWS's competitive edge in performance and pricing. Additionally, the company's focus on automation and efficiency—such as its same-day facility network and consolidation initiatives—was seen as a positive driver for future profitability. Analysts remain optimistic about Amazon's long-term prospects, with Maxim Group raising its price target to $251, citing AWS growth and improved EBIT margins due to expense control and cloud revenue mix.

On the downside, Amazon's lower-than-expected net sales in its North American and International segments, along with continued pricing pressure as customers gravitate toward lower-priced items, raised concerns among some analysts. While fulfillment expenses came in higher than anticipated, reflecting Amazon's efforts to maintain rapid delivery times, some worry this could pressure margins if consumer spending remains tepid. The company's heavy investments in AI and fulfillment network expansion could drive growth in the future, but near-term risks remain, especially with economic uncertainties affecting discretionary spending. Despite these challenges, analysts like Joseph Feldman believe Amazon's market share, Prime membership, and technological investments position it well for sustained growth.

Ultimately, Amazon's Q3 results will likely hinge on the balance between growth in AWS and advertising and the impact of higher expenses in retail and infrastructure investments. If Amazon can demonstrate sustained momentum in high-margin segments like AWS and advertising, along with disciplined cost management in retail, then the stock could see continued upside. The Q4 guidance will be crucial, as investors seek reassurance that Amazon's capex-heavy strategy will pay off amid macroeconomic headwinds and a competitive landscape.

If it is able to outpace expectations, then the stock will test that $ 200 psyche resistance. However, any shortfall will make such a move extremely difficult given its elevated valuation among peers.