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Will Amazon’s Ramped-Up Spending Hurt Its 4Q16 Performance?

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Questions linger over return to big spending

Rising costs overshadowed Amazon’s (AMZN) earnings in the last quarter. Will the story remain the same for 4Q16?

Consensus estimates call for Amazon to post revenue of $44.7 billion in 4Q16, up from $35.7 billion the year prior and near the high end of the internal guidance of $42.0 billion–45.5 billion. Adjusted EPS (earnings per share) are expected to be $1.35, compared with $1 a year ago.

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Uneasy over Amazon’s spending habit

Amazon’s return to big spending has recently caused concern among investors. It has cast doubts on the company’s ability to meet earnings expectations and is brewing volatility in the stock as the 4Q16 earnings release approaches.

In 3Q16, the company reported a 26% increase in operating expenses in its North American segment. The increase led to its North American operating margins shrinking to 1.4% from 4% in the prior quarter. Operating expenses in the international segment rose 24% in 3Q16, underscoring the impact of the company’s ramped-up spending. Amazon is spending heavily on expanding its logistics network, producing original programming for its Prime Video service, and expanding its Prime Video service abroad. Netflix (NFLX) and Amazon, vying for the control of the subscription video market, are pumping billions of dollars into the production of original shows and movies to distinguish their services.

AWS could ease spending pressure

High pricing during the holiday season and robust growth in Amazon’s cloud division, Amazon Web Services (or AWS), could offset the impact of the company’s increased spending. AWS is a fast-growth, high-margin business. Amazon leads rivals Microsoft (MSFT), Oracle (ORCL), Alphabet’s (GOOGL) Google, and IBM (IBM) in the cloud computing space.

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