* Reports 3Q 2019 results on Thursday, October 24 after the close
* Revenue expectation: $ 68.82 billion
* EPS expectation: $ 4.59
Investors don't expect big surprises when e-commerce giant Amazon.com (NASDAQ 🙂 reports its third quarter today. The company has already warned that escalating costs can damage profitability in the short term.
Costs associated with the one-day delivery service increased costs and significantly reduced efficiency in the second quarter. The investment needed to ship merchandise within 24 hours will put pressure on revenue for the rest of the year, Chief Financial Officer Brian Olsavsky told analysts in July.
For these reasons, analysts expect on average a 20% drop in earnings for the quarter to $ 4.59 per share, while revenue should continue to rise and is expected to be around $ 69 billion for the period.
The third quarter is also when Amazon usually invests in its facilities prior to the busy holiday-shopping season at the end of the year, so investors are probably prepared for the company to show a peak in spending.
This scenario was not very encouraging for short-term investors who were attracted to this share by the company's growing profitability: the operating profit margin dropped from 7.4% in the first quarter to 4.9% in the second quarter. The margin of the third quarter, based on the center of Amazon's forecast, implies a number of less than 4%.
Trading at $ 1,762.17 at the end of yesterday, Amazon's shares fell around 13% from this year's high, but still around 20% before 2019. The share is one of the least favorite names this year among major tech stocks, the so called FAANG.
Focus is on sales
In our opinion, as long as this comparison of higher costs and falling profitability is balanced against rising sales, the Amazon shares will not have a large sale. If Amazon does not show revenue growth the rest of the year, investors will certainly be shocked.
But we see a small chance of a big mistake on that front. The health of the US economy remains strong, consumers have not interrupted their spending and e-commerce is still in the growth phase, keeping Amazon ahead.
Another reason that makes us comfortable when recommending Amazon shares is the success of Chief Executive Officer Jeff Bezos in diversifying the company's revenues. He also opens several new growth areas outside the low margin activity of selling goods online.
Amazon has the largest cloud platform in the world and serves large business customers. Amazon Web Services, known as AWS, grew by 37% in the second quarter. Amazon & # 39; s digital advertising company, another high-margin company, is growing three-fold. Backed by these highly profitable units, the company has been able to disrupt many industries and continue to do so for a long time.
In addition to the company's business fundamentals, a potential threat that will keep Amazon stocks under pressure is the intense government oversight of antitrust regulators and legislators who see the giant retailer as a monopoly. The US Department of Justice opened a broad antitrust investigation this summer as to whether large technology companies are using their power to suppress competition.
Bottom Line
Despite these problem areas, we continue to like Amazon stocks for long-term investors. Investing in technology stocks is not without risk, especially in this late phase of the bull cycle, which is beginning to show signs of peak. But for long-term investors, Amazon is still one of the best bets between fast-growing technology stocks.
