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Amazon Stock: What Can Investors Expect in Q3?

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Amazon (AMZN) will announce its third-quarter results on October 24. We’ll discuss analysts’ financial estimates and how the company’s major business segments performed.

Analysts expect Amazon to post revenues of $68.8 billion in the September quarter—a rise of 21.6% YoY (year-over-year). Despite the revenue growth, analysts expect the company earnings to fall 20.5% to $4.57 in the third quarter.

Amazon posted revenues of $56.58 billion with an adjusted EPS of $4.57 in the third quarter of 2018. The company beat the earnings estimates in three of the last four quarters. Amazon reported an EPS of $5.22 in the June quarter, which was 6.3% below the estimates of $5.57.

In the first quarter, Amazon’s EPS of $7.09 was 50.2% higher compared to the estimates of $4.72. The company also beat the estimates by 6.3% in the fourth quarter of 2018 and by 83.1% in the third quarter of 2018, as you can see in the above chart.

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What could drive Amazon’s third-quarter revenues?

While online stores will rake in most of Amazon’s sales, the company will count on its high growth segments like Amazon Web Services and Subscription Services to drive its sales higher.

In 2018, Amazon’s physical store sales were the fastest-growing segment and rose 197% YoY (year-over-year) to $17.2 billion. We have seen how the company leads the global public cloud market despite growing competition from Microsoft (MSFT), Google (GOOGL) and Alibaba (BABA). Amazon is also the third-largest digital advertisement platform behind Google and Facebook.

North America continues to be the largest market for Amazon. The region accounted for 61% of the company’s total sales in the trailing 12-month period.

Low-profit margin estimates  

Amazon expects third-quarter sales between $66 billion and $70 billion with an operating income between $2.1 billion and $3.1 billion. The operating income was $3.7 billion in the third quarter of 2018. The operating margin estimates for the September quarter were significantly below analysts’ projections of $4.3 billion.

Notably, the possibility of a lower operating income didn’t sit well with investors. The expectation impacted Amazon’s stock price. The stock fell close to 12% within a week after the company announced its second-quarter results.

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In the trailing 12-month period, the company improved its operating margin by 103% YoY to $15.01 billion at the end of the second quarter. Amazon Web Services was the key profit margin driver. The segment accounted for 69% of the total operating profits in the last quarter. Any deviation in Amazon Web Services’ sales will impact the company’s bottom line.

The stock could fall if the company doesn’t meet analysts’ estimates or the earnings estimates. Weak guidance for the fourth quarter would also impact the stock.

In the fourth quarter, analysts expect the company’s sales to rise 20.7% to $87.4 billion and the EPS to grow 7.6% to $6.5.

Amazon has risen more than 12% year-to-date

Amazon stock has risen 12.5% in 2019. The stock has underperformed the S&P 500 Index. Notably, the stock has been trading sideways since the beginning of August. Investors are eagerly waiting for the company’s upcoming results.

Analysts tracking Amazon are still bullish on the stock. Among the 47 analysts, 43 recommend a “buy,” three recommend a “hold,” and one recommends a “sell.” Analysts have a 12-month average target price of $2,301, which indicates an upside potential of 33% from the current price.

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