Third-quarter earnings season is about to kick off in earnest, and to say investors will be paying close attention may be an understatement. There were plenty of moving parts at play in recent months. One company that exemplifies both the ongoing challenges and opportunities is Amazon (AMZN -0.19%).
On one hand, there's the continuing uncertainty related to the long-term impact of tariffs, which could ultimately be a drag on the company's online retail business. On the other, the ongoing adoption of artificial intelligence (AI) could be a catalyst for Amazon Web Services (AWS) -- the company's cloud computing segment -- and its fast-growing digital advertising business.
Amazon has a lot riding on its third-quarter earnings release on Oct. 31. Given the push and pull across the company's various business segments, should investors buy Amazon stock ahead of this crucial financial report, or wait until after the results have been released? Let's dig in to see what the evidence suggests.
Image source: Amazon.
Online retail conundrum
It's difficult to gauge the impact of President Trump's tariff agenda on Amazon's digital retail operations. In the second quarter, the company cited the inherent unpredictability it faced, specifically calling out tariffs as one factor that could "materially" impact its quarterly results.
Amazon's third-party merchants generate 62% of unit sales, and 24% of the company's revenue comes from seller fees. Many of these goods are imported from China, and there were threats of 100% tariffs on Chinese imports as recently as last week, which could potentially take a bite out of Amazon's results.
CEO Andy Jassy noted on the earnings call that the second quarter results hadn't been materially impacted by tariffs, and the results seemed to bear that out. Overall net sales increased 9% year over year to $166.7 billion, with 61% of its revenue tied to digital sales or third-party seller services. Investors will continue to watch closely to see if tariffs begin to erode Amazon's bottom line.
Partly cloudy
While e-commerce is Amazon's flagship business, it isn't the company's biggest breadwinner -- that distinction falls to its cloud segment.
AWS maintains its position as the undisputed heavyweight champion of cloud infrastructure -- the industry it pioneered -- controlling 30% of the market in the second quarter and growing 17% year over year, according to online data aggregator Statista. Perhaps more importantly, AWS generated 18% of Amazon's revenue and 53% of its operating income.
Jassy suggested that when it comes to generative AI, like compute, storage, and database, "people are going to actually want to run those applications close to where their other applications are running, where their data is ... [and there are] many more applications and data running in AWS than anywhere else." He continues to believe that "AI will be a substantial catalyst."
An important "ad" on
Another pillar of Amazon's growth is advertising, which is becoming the company's fastest-growing business. Ad revenue grew 23% year over year in Q3, fueled by live sports programming and Amazon Prime Video.
What began as a way for the company to earn money from its online sales platform has expanded into Amazon's next big avenue for growth. In addition to sponsored ads on its website and the ad-supported tier of Prime Video, Amazon generates ad sales through its Freevee streaming channel and its Twitch live-streaming video game platform. The company also recently announced an extensive partnership with Roku, which will create the "largest authenticated connected TV footprint in the U.S."
Time to buy?
I generally shy away from date-driven buying decisions and focus instead on whether a company has a runway for growth ahead. Based on the results of each of Amazon's major business segments, the answer appears to be an unequivocal "yes." In addition to its growing e-commerce, cloud, and advertising businesses, Amazon believes there is still a large, mostly untapped opportunity from AI.
Wall Street seems to agree, with a nearly unanimous bullish take of Amazon. Of the 68 analysts who have offered an opinion in October, 66 -- or 96% -- rate the stock a buy or strong buy, and not a single one recommends selling. Furthermore, the average price target of roughly $267 suggests there's additional upside of 23% (as of this writing).
However, just this week, Mizuho analyst Lloyd Walmsley reiterated his buy rating and $300 price target on Amazon, which would represent potential gains of 38% for investors. The analyst cited strong demand and additional cloud capacity coming online for AWS as driving the firm's bullish call.
Given its leading role in digital retail and cloud infrastructure services and its increasing leverage in digital advertising, it's clear that the road ahead for Amazon is long. Add to that the growing importance of AI and the company's captive (cloud) audience, and it seems clear Amazon is a buy.
Lastly, Amazon stock is selling for roughly 33 times trailing 12-month earnings. While that's a premium, it's well below the stock's three-year average multiple of 76, so from a historical standpoint, it's on sale.
