Amazon AMZN is set to report fourth-quarter 2017 earnings on Feb 1.
Continuous investments on expanding fulfilment centers, TV shows and movies, Amazon Web Services (“AWS”), acquisitions, India expansion and second headquarter in North America is expected to keep margins under pressure in the quarter.
However, revenues are expected to improve on strong Digital Day’ 17 sales, the integration of Whole Foods, Prime’s expanding customer base, AWS dominant market share and the Fulfillment by Amazon (“FBA”) strategy.
Moreover, strong adoption of Echo devices, reflected in the Thanksgiving weekend and on Cyber Monday, is likely to boost the top line.
Earnings Trends Improving
Amazon delivered a massive beat in third-quarter 2017. Earnings of 52 cents per share beat the Zacks Consensus Estimate by 51 cents. The figure surged 30% sequentially but was flat year over year.
Revenues of $43.7 billion beat the consensus mark by $1.6 billion and were up 15.3% sequentially and 33.7% year over year.
The Zacks Consensus Estimate for earnings increased by a penny to $1.85 in the last 30 days, reflecting 20.1% growth over the year-ago quarter.
The Zacks Consensus Estimate for revenues is currently pegged at $59.98 billion, up 37.1% year over year.
Amazon Web Services (AWS) to Drive Profits
AWS is the cash cow for Amazon. The business generates much stronger margins compared with the traditional retail business, which will remain a positive for the company’s profits as it continues to grow in the mix. Moreover, expanding customer base is likely to drive the top line.
Amazon’s persistent efforts to open more data centers globally and lower prices lend it a competitive edge against the likes of Microsoft MSFT. Moreover, new products like the threat detection service — Amazon GuardDuty — which was announced during the quarter, are growth drivers.
Further, AWS expansion in China through partnership with Ningxia Western Cloud Data Technology Co. Ltd. (“NWCD”) and the launch of the second data center is a positive.
However, the region is highly competitive, with the presence of Microsoft, which already operates a pair of cloud regions in China, with data centers in Shanghai and Beijing. Additionally, homegrown technology titans like Tencent and Alibaba BABA also offer their own cloud computing services.
Prime: An Emerging Catalyst
Amazon keeps its retail business very hard to beat on price, choice and convenience, on the back of a solid loyalty system in Prime and its FBA strategy. Higher spending on its platform along with focus on building video content, primarily for Prime subscribers, are catalysts.
Prime is now widely available and generates increased sales for Amazon. Prime Now, the company’s super-fast delivery service, is expanding rapidly in the United States.
Amazon’s international push is commendable. During the quarter, the company announced the launch of subscription-based Prime membership in Singapore. The service will focus on areas like fast and free shipping, streaming and gaming.
The move provides Amazon an edge over competitors including Lazada, the e-commerce site owned by Alibaba. Lazada launched its subscription-based customer loyalty program, LiveUp, in Singapore in April.
Internet of Things (IoT) Focus Helps to Sell More Products
Alexa powered Echo devices are going great guns and help the company sell more products and services. Alexa has already been integrated into a host of everyday devices for the digital home with agreements for more. Per Cowen & Co. consumer tracking survey, 84% of the Echo users in the United States use it for listening to music.
During the quarter, the company announced expansion of Music Unlimited service in 28 countries. The company has also begun to ship Amazon Echo devices in these countries.
The IoT focus has helped Amazon maintain supremacy in the home automation market. The company has expanded connected home lineup with Cloud Cam, a security camera that allows Amazon’s delivery workers enter homes to drop off packages when homeowners are away.
Moreover, the recently announced acquisition of Blink, a wireless security camera startup, will give the online retail giant an increased share in the connected home devices market.
Amazon.com, Inc. Price and EPS Surprise
Amazon.com, Inc. Price and EPS Surprise | Amazon.com, Inc. Quote
What Our Model Says
According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has a good chance of beating estimates if it also has a positive Earnings ESP. Sell-rated stocks (Zacks Rank #4 or 5) are best avoided.
Amazon has a Zacks Rank #3 and an Earnings ESP of -6.40%, which indicates an unlikely positive surprise. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Stock to Consider
Here is a stock you may want to consider as our proven model shows that it has the right combination of elements to post an earnings beat this quarter.
Kemet KEM has an Earnings ESP of +2.94% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
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