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What Wall Street is looking for in Amazon's earnings
Amazon.com (AMZN) has become one of the world's biggest brands on virtually no profit. Investors are imagining the possibilities now that the company is starting to show some earnings.
Amazon Web Services, the cloud-computing infrastructure that provides computing power and storage for some of the world's biggest businesses, is infusing technology margins into the retailing giant. And Amazon's third-party (3P) marketplace, fueled by outside sellers, presents handsome profit because the company doesn't have to source and buy the inventory.
Net income at the e-tailer likely jumped almost fivefold in the third quarter to $386 million, or 79 cents a share, from $79 million, or 17 cents, a year earlier, according to the average analyst estimate in a Thomson Reuters survey. Revenue probably increased 29 percent to $32.7 billion
"We believe the company can drive further margin expansion with 3P and AWS," wrote Neil Doshi, an analyst at Mizuho Securities, in an Oct. 24 report. Doshi recommends buying the shares and has a $950 price target, 14 percent above Tuesday's closing price of $835.18.
Analysts expect to see an increase in gross margin, or the amount of profit left after accounting for the cost of goods sold, to 35 percent from 34 percent a year ago and 30 percent at the end of 2014, according to FactSet.
AWS marks the most significant development for Amazon in recent years. Corporate servers and storage arrays are moving from office basements and co-location facilities to massive data centers run by Amazon, which allows customers to manage their data from computers anywhere.
Amazon pioneered the cloud infrastructure market a decade ago, giving it a substantial headstart over Microsoft (MSFT), Google (GOOGL) and IBM (IBM) and providing the type of margins the company could never get out of its retail operation. Analysts on average expect AWS growth of 55 percent to $3.2 billion.
Rather than generating profit growth to improve his stock price multiple and return cash to shareholders, Amazon CEO Jeff Bezos reinvests it elsewhere. From content like movies and music to gadgets like the Kindle Fire and Echo home assistant, the Seattle-based company is doing everything it can to keep consumers buying items from Amazon and finding value in annual Prime subscriptions.
It's also building more fulfillment centers and bolstering its logistics system, delivering items seven days a week and even moving deeper into the grocery business.
Because of Amazon's reach and the vastness of its warehouses, third-party sellers are flocking to the platform. Those merchants include resellers of big brands as well as owners of private labels who would otherwise have difficulty getting discovered.
Roughly half of Amazon's transactions now go through third-party sellers, and those sales result in higher margins because the company has very low costs compared with items that it buys and holds in inventory.
Any letdown in Thursday's earnings report could certainly punish the stock. The shares have jumped 39 percent in the past year, and optimism is particularly high as the company gears up for the holiday shopping rush.
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