Amazon’s earnings report is around the corner

e-Commerce giant Amazon (AMZN) is scheduled to report its second-quarter earnings results after the closing bell on July 25.

Amazon’s revenue growth has slowed in the past four quarters as its core business growth has been decelerating. Additionally, Amazon is no longer receiving a revenue boost from its Whole Foods acquisition. The $13.7 billion acquisition during the third quarter of 2017 boosted its revenue growth in the four quarters after that.

The cloud computing giant generated $59.7 billion in revenue in the first quarter, a rise of 17.0% YoY (year-over-year). In the second quarter of 2019, Wall Street expects Amazon to generate $62.5 billion in revenue, which represents an 18.1% rise YoY.

Meanwhile, Amazon’s net profits have soared to record levels in the last few quarters. During the first quarter, the company made a $3.56 billion net profit.

AWS has been Amazon’s growth engine

The company’s soaring profits have largely resulted from its burgeoning cloud business, AWS (Amazon Web Services). AWS now represents a higher percentage of the company’s business. AWS is a much more lucrative business for Amazon than its core business. Hence, it’s contributing more and more to the company’s bottom line.

AWS has been consistently growing by over 40% YoY each quarter despite its size. The segment represented 11.5% of the company’s total revenue in the last four quarters compared to 9.9% in the four quarters prior to that.

It generated $7.7 billion in revenue in the first quarter, growing 41% YoY and making up 12.9% of the company’s total revenue. Its operating income also soared 59% to $2.22 billion in the quarter. Analysts expect similar growth for it in the second quarter, and they foresee continued growth in the overall cloud sector.

Amazon’s Prime membership revenue has surged despite its price hike

Amazon’s North American business accounts for around 60% of its business. Its increasing profitability has also contributed to the company’s soaring bottom line. The segment’s operating income almost doubled during the first quarter, rising to $2.29 billion.

The main driver of this impressive profitability has been the stickiness of Amazon’s Prime membership. Prime members in the US seem to have stuck with their memberships despite Amazon’s hiking the annual fee from $99 to $119 last April.

This stickiness is evident in the fact that Amazon’s revenue from subscription services accelerated in the first quarter. The company’s Subscription segment, which mainly consists of revenue from Prime memberships, surged 42% YoY to $4.3 billion in the quarter.

What to Watch For in Amazon’s Q2 Earnings

Amazon is investing a lot in its own logistics

However, the tech behemoth continues to invest a lot of money into its own business. Amazon said it would be spending $800 million on making free one-day shipping the standard for US Prime members during the second quarter.

The company is also becoming less reliant on shipping companies such as FedEx and UPS. Amazon is investing big-time in its own logistics services, including the building of more warehouses. These factors could weigh on the company’s bottom line in the short term.

Another item to watch for in Amazon’s second-quarter earnings is its shipping costs. The company has spent a whopping $28.9 billion on shipping costs in the last four quarters. It spent $7.3 billion on shipping in the previous quarter, a 21% YoY increase. Shipping costs could dampen Amazon’s second-quarter earnings.

Amazon’s second-quarter EPS are expected to be subdued

Analysts expect Amazon to see EPS of $5.58 on an adjusted basis in the second quarter, which would represent a rise of 10.1% YoY. The company expects to generate an operating profit of $2.6 billion–$3.6 billion during the second quarter. It made a $3.0 billion operating profit in the previous year’s period.

Meanwhile, Amazon’s ad business has been one of its many bright spots in recent quarters. The business was more than doubling until its growth slowed considerably in the first quarter.

Amazon’s ad business slowed in the first quarter

The company’s Other segment, which mostly consists of its advertising business, grew only 34% YoY to $2.7 billion in the first quarter. The company’s second-quarter numbers will indicate whether or not this was just an aberration.

Meanwhile, Amazon’s hardware business has been growing quickly, to put it mildly. The company’s two-day Prime Day was a blockbuster. It said that Prime members worldwide bought over 175 million items during the period. The Alexa-supported Echo Dot and Fire TV Stick with Alexa voice remotes were the top-selling devices.

The company said that its sales over the two days beat out its sales on the previous Black Friday and Cyber Monday combined.

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