Amazon 2nd Quarter Preview: Will AWS Keep Its Lead in Cloud?

Though retail is starting to show profitability again, AWS still carries the burden of consistent bottom line growth

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Amazon will be reporting its second quarter earnings on July 28. The first quarter earnings results was so good that the stock popped from $600 to $683 in a few days after the results came out, and it has continued its upward momentum since then, trading near $750 in the last few days.

Net income and free cash flow

Amazon seemingly fired on all cylinders during the first quarter as net sales were up 28% compared to first quarter of 2015, operating cash flow and free cash flow were up and, most important, net income was $513 million during the first quarter 2016 compared to a net loss of $57 million for the year-ago quarter.

The role of Amazon Web Services was crucial during the first quarter; without it, Amazon would have still been in the red. During the first quarter, operating income from North America retail operations was $588 million, International had losses of $121 million and AWS took the numero uno spot with $604 million, resulting in consolidated net income of $1,071 million.

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For the second quarter, all eyes will be on how much operating income the company will post from its North American operations and how much growth AWS nets for the quarter.

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Sales growth

Sales have never been an issue for Amazon, as the company continues to expand the depth of its offerings within its home market, while continually expanding international operations. Though the company is having a tough time in China, it's already cementing its place at the top of India’s ecommerce industry. So Amazon’s international results should be looked at in terms of how much growth it received instead of how much bottom line it earned.

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On the home front, it celebrated its second ever Amazon Prime Day earlier this month on July 12. Though the tremendous success of that global online event will only be reckoned in the third quarter earnings, Amazon started offering special deals and offers from about the end of June, so we could see some gains coming from the event. With the massive success of the program comes the surety that Amazon Prime Day will now be a regular annual event.

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Key metric for Q2 2016

AWS has been growing at above the 50% range year over year for the last four quarters. With cloud adoption by enterprises and smaller businesses still growing at a clip, and Microsoft reporting that its cloud offering - Azure - grew by a whopping 102% during the recent quarterly results that came out on July 19. IBM is already in second place on the Infrastructure-as-a-Service front and Microsoft comes in a close third, so if Amazon wants to maintain its lead over time, they have to show a growth rate higher than 50% during the second quarter and beyond.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.