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3 Big Factors That Could Impact Amazon's Q3 Earnings

By Danny Vena - Oct 22, 2019 at 6:35AM

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What Amazon reports on these financial metrics will likely cause big moves in the stock price later this week.

E-commerce leader Amazon.com (AMZN -1.13%) is scheduled to report earnings later this week, and this quarter will likely have even more moving parts than usual, which could significantly affect the results. The tech giant is scheduled to release its third-quarter results after the markets close on Thursday, Oct. 24.

The second-quarter results were a mixed bag for investors. While revenue was higher than Amazon's forecast, operating income was a bit lighter than expected. Those results have pressured the stock, which is down nearly 10% over the past three months, as investors await signs of improvement. 

Let's look at the three factors that could have the biggest impact on its upcoming results.

An Amazon Fulfillment Center seen from above.

Image source: Amazon.com.

1. Prime Day sales

The company announced in July that its Prime Day sales were "once again the largest shopping event in Amazon history." The customer loyalty sale took place on July 15 and 16, so the results will be included in the company's third-quarter results.

The event was longer than in prior years, increasing to 48 hours in 2019, up from just 36 hours the year before. It's important to note that Amazon doesn't break out how much its "Black Friday in July" sale adds to its coffers, so investors shouldn't expect that to change. Some estimates from the prior year put Prime Day sales at more than $4 billion. Any upside from Prime Day could result in unexpectedly strong revenue growth.

2. Amazon Web Services

The biggest contributor to its financial success continues to be its cloud computing operations. In the second quarter, Amazon Web Services (AWS) generated more than 13% of the company's revenue and a whopping 69% of its operating income. Even more important is the leverage AWS is able to achieve. Even as its cloud business continues to grow, Amazon is still able to achieve impressive operating margins nearing 25% so far this year, ticking up slightly from its level in 2018.

AWS continues to generate impressive growth even as the company maintains its lead in the cloud computing space. Revenue for the segment grew 37% year over year in Q2, on top of 47% growth last year. As the world's ongoing digital transformation continues, AWS could continue to be the industry leader. Some think Amazon's cloud computing business alone could be worth as much as $400 billion.

3. One-day shipping

This will be the first full quarter of results since it announced that it planned to offer speedier delivery to Prime members and shorten its standard two-day shipping option to just one day for many products. The company said back in April that the faster shipping would initially be available on about 100 million items that previously shipped within two days, with that number growing in the future.

At the time, Amazon said the move would cost about $800 million during the second quarter, though spending was ultimately higher as it resulted in a more meaningful step-up in one-day shipments than originally estimated.

CFO Brian Olsavsky said on the conference call that the company included "an accelerating cost penalty in our Q3 guidance" as a result of the additional delivery capacity and transition costs in the warehouses. Olsavsky also noted some lower productivity as the result of the changes.

By the numbers

For the third quarter, Amazon forecast net sales in a range of $66 billion to $70 billion, which would represent year-over-year growth of between 17% and 24%. This includes about 30 basis points of headwinds from currency exchange rates. The company is also expecting operating income between $2.1 billion and $3.1 billion, a decline from $3.7 billion in the prior-year quarter -- almost certainly a result of Amazon's push into one-day shipping. 

To put this into the context of Wall Street sentiment, analysts' consensus estimates are calling for revenue of $68.79 billion and earnings per share of $4.60.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon. The Motley Fool recommends Amazon. The Motley Fool has a disclosure policy.

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