Amazon (AMZN, Financial) will be reporting its third quarter earnings on Oct. 27 after the market close. Expectations are indeed running high for the e-tail juggernaut after the company started posting solid margins from its North American retail segment in the last few quarters.
Analysts are expecting the company to post a consensus EPS of 86 cents on the back of $32.69 billion in revenues. Amazon has guided a sales growth range of 22% to 32%, or revenue range of $31 billion to $33.5 billion, for the third quarter, and the market is expecting the company to come in near the top end of its guidance range. Operating income for the quarter is expected to be in the range of $50 million to $650 million compared to $406 million in the third quarter of 2015.
Third-quarter sales in 2015 came in at $25.4 billion, a growth of 23% compared to the prior period and, looking at the current estimates, it's clear that the market is expecting Amazon to continue with its double-digit growth spree that has been going on for the last several years.
One of the reasons behind high expectations for Amazon, which has allowed the stock price to rise by more than 42% in the last 12 months, is the way margins are expanding in its primary market in North America. As you can see from the table below, margins have been consistently above 3%, a clear indication that size and scale have started to work in the company’s favor in its best market. As such, operating margins across all segments will be the key metrics to watch during the earnings release.
Amazon Web Services has been growing at double-digit rates for the last few years and is already the most profitable segment for the company. Though the rate of growth has come down a little this year compared to last year, Amazon should be able to once again post strong double-digit growth numbers for AWS. Competition has intensified in this segment with Google and Oracle (ORCL, Financial) forcing their way into the picture this time, but the fact that all the cloud companies keep comparing themselves with Amazon shows who the market leader really is.
During the second quarter, AWS revenues grew 58.22% to reach $2.886 billion, which would mean an annualized run rate of $11.544 billion. If Amazon’s past growth trend continues, the company will be blazing past $3 billion in quarterly revenues from the cloud segment, giving it a run rate of $12.5 billion or more. This will be a significant achievement for the company considering the overcrowded and highly competitive landscape of the cloud industry.
Using Amazon’s price-earnings (P/E) multiple to do a comparative valuation will be a bad mistake as the company obviously gives more importance to increasing cash flows instead of taking care of bottom line numbers. Despite rising more than 40% in the last 12 months Amazon is trading around 3.2 times its sales, which is a little better than other hyper growth stocks such as Facebook (FB, Financial) and Netflix (NFLX, Financial).
Amazon looks like it is on its way to breaching the $1,000 barrier and is trading around $815. Third-quarter quarter earnings could act as a catapult to get the stock closer to that barrier. For a company like Amazon, you can depend on solid sales growth, but since we don’t really know how much the company decided to spend during the quarter, don’t be surprised if operating margins go back to their old levels.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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