* Reports 3Q 2019 results on Thursday, Oct. 24, after the close
* Revenue expectation: $68.82 billion
* EPS expectation: $4.59
Investors aren't expecting any major surprises when e-commerce giant Amazon.com (NASDAQ:AMZN) reports its third-quarter earnings later today. The company has already warned that escalating costs could hurt profitability in the short-run.
Costs related to its one-day delivery service drove up expenses and reduced efficiency significantly in the second quarter. The investment needed to dispatch merchandise within 24 hours will put a strain on earnings for the rest of the year, Chief Financial Officer Brian Olsavsky told analysts in July.
For these reasons, analysts on average are expecting a 20% decline in profit for the quarter to $4.59 a share, while sales should continue to surge and are expected to come in about $69 billion for the period.
The third quarter is also when Amazon typically invests in its facilities ahead of the busy holiday shopping season at the end of the year, so investors are likely to be prepared for the company to show a spike in spending.
This scenario hasn’t been very encouraging for short-term investors, who were attracted to this stock by the company’s growing profitability: it's operating profit margin slipped from 7.4% in the first quarter to 4.9% in the second quarter. The third-quarter margin, based on the midpoint of Amazon’s forecast, implies a number below 4%.
Trading at $1,762.17 at yesterday's close, Amazon's shares are down about 13% from this year’s high, though still up about 20% for 2019. The stock is one of the least-favored names this year among big tech stocks, the so-called FAANG.
Focus Is on Sales
In our view, as long as this equation of higher costs and falling profitability is balanced with rising sales, Amazon stock won’t face a big sell-off. If Amazon fails to show growth in sales the rest of the year, then investors will certainly get spooked.
But we see scant chance of a big miss on that front. The health of the American economy remains strong, consumers haven’t put a break on spending, and e-commerce is still very much in its growth phase, keeping Amazon on top of its league.
Another reason that makes us comfortable in recommending Amazon stock is Chief Executive Officer Jeff Bezos’ success in diversifying the company’s revenue. He is also opening up several new areas of growth beyond the low-margin business of selling goods online.
Amazon runs the biggest cloud platform in the world, serving large corporate customers. Amazon Web Services, known as AWS, grew at a rate of 37% in Q2. Amazon’s digital advertising business, another high-margin venture, is expanding at a triple-digit rate. Backed by these extremely profitable units, the company has been able to disrupt many industries and can continue to do so for a long time.
Beyond the company’s business fundamentals, one potential threat that will keep Amazon stock under pressure is the intense regulatory scrutiny from government antitrust regulators and lawmakers who see the giant retailer as a monopoly. The U.S. Department of Justice opened a broad antitrust review this summer into whether big technology companies are using their power to stifle competition.
Bottom Line
Despite these trouble spots, we continue to like Amazon stock for long-term, buy-and-hold investors. Investing in technology stocks isn’t without risks, especially at this late stage of the bull-cycle which is beginning to show signs of peaking. But for long-term investors, Amazon is still one of the best bets among high-growth technology stocks.