The second-quarter earnings season is here, and on July 25, Big Tech giant Amazon (AMZN) is scheduled to report its financial results. As a long-term AMZN stock bull, I’m confident the company’s positive momentum will persist in Q2, driven by its shift to higher-margin services, advancements in AI, and Amazon Web Services (AWS), its crown jewel.
On this text, I’ll take care of expectations for the June quarter, and I’ll answer the following questions: how strongly has Wall Street projected Amazon’s top and bottom-line growth? What are the vital topics investors should be listening to? And eventually, is the stock a buy before earnings day?
Amazon’s Q1 Recap and Wall Street’s Outlook
Over the past few quarters, it’s turn into clear that under CEO Andy Jassy, Amazon has shifted its focus to higher-margin services like cloud computing and promoting, moving away from first-party retail sales.
Since taking on, Jassy has been dedicated to reducing costs, streamlining operations, and restructuring Amazon’s achievement network by eliminating 1000’s of jobs. He has also maintained a sturdy take care of AWS, which stays an important and highly profitable segment of Amazon’s business. Over the past yr, these segments have turn into significantly more profitable, and Q1 2024 was no different.
Throughout the last quarter, reported in April, Amazon impressed the market by beating expectations for EPS by 18.6% and revenues by $764 million.
Comparing Q1 2023 to Q1 2024, Amazon’s operating margins have greatly improved. AWS was the highlight, as Amazon managed to reinforce its operating margin to 10.7% from 3.7% in Q1 2023, with the cloud segment reporting operating margins going from 24% to 37.6% (although this was partly on account of fixing the estimated useful lifetime of their servers). In North America, the operating margin jumped from 1.2% to 5.8%. The International segment went 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 predicted to report annual EPS growth of 56% inside the second quarter, with 29 analysts revising their projections upwards and only 6 downwards inside the last three months.
Regarding revenues, Amazon is predicted to increase them by 10.6% to $148.64 billion compared with Q2 last yr. Nevertheless, this figure reflects greater skepticism, as only 4 analysts have revised their projections upwards, and 34 have revised them downwards.
In response to Amazon’s management, net sales for Q2 are expected to grow between 7% and 11%, already accounting for unfavorable foreign exchange impacts. Furthermore, weaker consumption trends in Europe compared with the U.S. could prove to be a headwind.
Compared with the consensus revenue estimate of $148.7 billion, Amazon guided net sales to be between $144 billion and $149 billion. Analysts look like 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 inside the last 10 quarters. If it beats them again in Q2, it’ll be the sixth consecutive quarter topping estimates.
Key Areas for Investors to Focus On
It’s highly likely that analysts and investors will focus heavily on AWS’s performance. Amazon has been significantly growing AWS in recent quarters, consistently beating expectations. The company’s plans to ramp up capital expenditures (CapEx) highlight the robust demand for generative AI inside its cloud computing segment. In Q1 alone, Amazon spent $14 billion on CapEx, with total investments reaching $48.4 billion last yr.
A key focus shall be how AWS defends its market share against competitors like Microsoft’s (MSFT) Azure and Alphabet’s (GOOGL) Google Cloud, each of which have been strong performers with proprietary models.
There’s also interest in whether enterprises are favoring open-source models, potentially benefiting AWS greater than its competitors. CEO Andy Jassy emphasized that customers prefer to bring their models to their data as a substitute of the other way around, differing from Azure and Google Cloud’s approach.
Two other critical areas for investor satisfaction shall be demonstrating AI’s impact on revenue growth beyond AWS, particularly in Promoting, where last quarter saw a sturdy 24% year-over-year increase in ad sales.
Also, investors will closely watch Amazon’s ability to execute its strategy of fast and efficient deliveries for Prime members, which goals to reinforce consumer experience and drive higher margins.
Last quarter, Amazon guided that it expects operating income between $10 billion and $14 billion, up from $7.7 billion a yr ago, including seasonal stock-based compensation expenses.
In my view, if Amazon delivers growth in AWS bolstered by AI, expands Promoting 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 likelihood of disappointment this quarter. This also increases the likelihood of positive surprises. Looking back on the last five quarters, AMZN shares have typically shown a positive response the day after earnings results.
Is AMZN Stock a Buy, In response to Analysts?
Wall Street is incredibly bullish on Amazon stock, and it seems that evidently the Q2 results are set to please investors. Every analyst on Wall Street covering AMZN has given it a Buy advice, forming a Strong Buy consensus rating. The average AMZN stock price goal amongst the numerous 44 bullish analysts is $223.76 per share, suggesting upside potential of twenty-two.6%.
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Key Takeaway: Bullish on Amazon Ahead of Earnings
Although analysts have set high expectations for Amazon to achieve the upper end of its Q2 guidance, given the company’s conservative track record, I feel this shouldn’t pose a problem. If Amazon shows investors strong AWS growth, robust revenue trends from AI investments, and a solid performance in Promoting revenue, it’s vulnerable to have a sturdy Q2.
At present, I don’t foresee any obstacles that may contradict these points, making me bullish on AMZN stock before its earnings report. In reality, management’s tone last quarter was overly optimistic regarding the company’s growth trajectory in AI, particularly with AWS, suggesting its growth story stays to be in its early stages.