As the second-quarter earnings season unfolds, Amazon (AMZN) is set to report its financial results on July 25. As a long-term bull on Amazon stock, I am optimistic that the company’s positive momentum will persist in Q2, driven by its shift to higher-margin services, advancements in AI, and the continued strength of Amazon Web Services (AWS), its most profitable segment.
Amazon’s Q1 Recap and Wall Street’s Outlook
Under CEO Andy Jassy, Amazon has strategically shifted its focus towards higher-margin services such as cloud computing and advertising, moving away from first-party retail sales. This strategic pivot has been complemented by cost reductions, streamlined operations, and a restructured fulfillment network, resulting in significant job cuts. The emphasis on AWS has paid off, with substantial improvements in operating margins across various segments.
In Q1 2024, Amazon impressed the market by surpassing expectations, beating EPS estimates by 18.6% and revenue estimates by $764 million. Comparing Q1 2023 to Q1 2024, Amazon’s operating margins have greatly improved. AWS was the highlight, as Amazon managed to improve its operating margin to 10.7% from 3.7% in Q1 2023. Specifically, AWS’s margins increased from 24% to 37.6%, partly due to changes in the estimated useful life of their servers. In North America, the operating margin improved from 1.2% to 5.8%, and the International segment saw a turnaround from -4.3% to 2.8%.
Faced with this shift in margins, Wall Street has raised the bar, especially regarding Amazon’s bottom line. The e-commerce giant is expected to report annual EPS growth of 56% in the second quarter, with 29 analysts revising their projections upwards and only 6 downwards in the last three months. Regarding revenues, Amazon is expected to increase them by 10.6% to $148.64 billion compared to Q2 last year. However, this figure reflects greater skepticism, as only four analysts have revised their projections upwards, and 34 have revised them downwards.
Amazon’s management has guided net sales for Q2 to grow between 7% and 11%, already accounting for unfavorable foreign exchange impacts. Additionally, weaker consumption trends in Europe compared to the U.S. could prove to be a headwind. Compared to the consensus revenue estimate of $148.7 billion, Amazon guided net sales to be between $144 billion and $149 billion. Analysts seem to be betting on the high end of the range, possibly signaling that the company’s top-line projections are too conservative.
But even with the bar set high, Amazon has beaten Wall Street’s EPS estimates seven times in the last ten quarters. If it beats them again in Q2, it will be the sixth consecutive quarter topping estimates.
Key Areas for Investors to Focus On
As Amazon prepares to release its Q2 results, several key areas will likely attract significant attention from analysts and investors:
- AWS Performance: AWS has been a consistent growth driver for Amazon, and its performance will be scrutinized closely. The company’s plans to ramp up capital expenditures (CapEx) highlight the robust demand for generative AI within its cloud computing segment. In Q1 alone, Amazon spent $14 billion on CapEx, with total investments reaching $48.4 billion last year. Investors will be keen to see how AWS defends its market share against competitors like Microsoft’s (MSFT) Azure and Alphabet’s (GOOGL) Google Cloud, both of which have been strong performers with proprietary models. There’s also interest in whether enterprises are favoring open-source models, potentially benefiting AWS more than its competitors. CEO Andy Jassy emphasized that customers prefer to bring their models to their data instead of the other way around, differing from Azure and Google Cloud’s approach.
- Advertising Revenue: Amazon’s advertising segment has shown impressive growth, with a 24% year-over-year increase in ad sales last quarter. Investors will closely watch whether this trend continues, as it indicates the broader impact of AI on revenue growth beyond AWS.
- Prime Deliveries: Amazon’s strategy to enhance Prime members’ delivery experience, aiming for efficiency and higher margins, will be another focal point. Improvements in this area could drive consumer satisfaction and retention, further bolstering Amazon’s competitive edge in the e-commerce space.
Last quarter, Amazon guided that it expects operating income between $10 billion and $14 billion, up from $7.7 billion a year ago, including seasonal stock-based compensation expenses. In my view, if Amazon delivers growth in AWS bolstered by AI, expands advertising revenue, and improves operating income through efficient Prime deliveries, it should report a stable quarter. Historically, Amazon guides investors conservatively to avoid overpromising, suggesting little chance of disappointment this quarter. This also increases the likelihood of positive surprises. Looking back at the last five quarters, AMZN shares have typically shown a positive reaction the day after earnings results.
Is AMZN Stock a Buy Before Earnings Day?
Wall Street remains extremely bullish on Amazon stock, and it seems that the Q2 results are set to please investors. Every analyst on Wall Street covering AMZN has given it a Buy recommendation, forming a Strong Buy consensus rating. The average AMZN stock price target among the 44 bullish analysts is $223.76 per share, suggesting an upside potential of 22.6%.
Given Amazon’s conservative guidance and historical trend of beating EPS estimates, the company is well-positioned to exceed expectations once again. Analysts’ strong buy consensus, with an average price target of $223.76 per share, indicates a potential upside of 22.6%. In conclusion, Amazon’s strategic focus on high-margin services, AI advancements, and robust AWS performance suggests a strong Q2 ahead. As such, I remain bullish on AMZN stock, confident in its ability to deliver positive surprises and sustain its growth trajectory.
Disclosure
The views expressed in this article reflect personal opinions and analysis and are not investment advice. Always conduct your own research before making investment decisions.