The second earnings season of the year is shifting into third gear this week, with more than 135 S&P 500 Index companies expected to report their first-quarter results. Amazon.com Inc. (AMZN, Financial), the world’s largest online retailer, is expected to be among the top contenders to beat analyst expectations on both revenue and net income as the company gears up for the next growth phase of its e-commerce business.
Analysts have suggested Amazon is entering a new growth phase that will take place over the next two decades, in which the company’s rich and growing portfolio of business verticals will play a crucial role. The company has been integrating some crucial business segments into its business model and, based on recent performance, they are beginning to pay off.
Amazon Prime, its premium subscription service, has recently benefited from adding new services, causing its number of subscribers grow to 100 million. The company has also been growing its digital advertising business, which contributed about $2.35 billion to its top line in 2017. Reports indicate this business segment is growing at a rate of 47% year over year and is expected to deliver a similar growth rate, albeit in the low 40s, in the first quarter.
Amazon Web Services, which was established in 2006, is another booming business for the company. It is expected to continue delivering 40%-plus growth for the foreseeable future. As more businesses continue to migrate to online platforms, the company’s web services unit will continue to grow. The migration will also have a similar impact on its digital advertising unit, which has been growing rapidly over the last several quarters.
The company’s stock is up more than 200% since February 2016 and looks set to maintain the current upward trend for the next several quarters.
This growth will primarily be boosted by the huge margins Amazon Web Services commands as it continues to contribute more to the company’s revenue. Currently, the unit contributes about 11% to the revenue mix, which, while significant, is still miles behind what Amazon’s retail e-commerce business brings to the table.
With the retail business yielding operating margins of just 2% compared to Amazon Web Services' margin of 22%, however,Ă‚ the rapidly growing cloud services unit could have a bigger impact on the bottom line, which would be good for the company going forward. Amazon's digital advertising unit also boasts an impressive operating margin of 24%, but its small contribution to the revenue mix means whatever remains after all expenses is not massive enough to move the bottom line.
Another interesting unit that investors will be looking at is the company’s online groceries unit, which gained a major boost following last year’s $13.7 billion acquisition of Whole Foods. The company has already started integrating Whole Foods into its business model by making some of its tech products available at Whole Foods stores and marking down prices on some groceries by as much as 50%.
Analysts expect Amazon to report revenue of about $50 billion for the quarter, a major increase from $35.71 billion last year. Earnings are expected to decline significantly to $1.26 per share, compared to last year’s figure of $1.48. Analysts from Credit Suisse have a different opinion, expecting Amazon to deliver earnings of approximately $2.93 per share on $48.8 billion in revenue.
It will be interesting to see how the e-commerce giant responds to analyst projections when actual results are released on Thursday.
In summary, Amazon is using its expansive portfolio of businesses to grow its subscriber base. While it continues to face challenges in some of its growing business units, like Prime Video, due to competition from market leader Netflix Inc. (NFLX, Financial), and Amazon Web Services, where it faces rivalry from several tech giants, including Microsoft Corp. (MSFT, Financial) and Oracle Corp. (ORCL, Financial), its ability to harness synergies from its multiple businesses could create a unique advantage over its rivals.
Disclosure: I have no positions in the stocks mentioned in this article.
