Amazon Earnings Preview: Investors Watch Cost Surge As Stock Gains Stall
Investing.com | Jan 30, 2020 11:37AM ET
* Reports Q4 2019 results on Thursday, Jan. 30, after the close
* Revenue expectation: $85.97 billion
* EPS expectation: $4.05
Amazon.com (NASDAQ:AMZN) has been having a tough time over the past few months as it tries to convince investors that its massive lead in e-commerce also makes its shares a better bet than those of other technology giants.
The problem that the largest e-commerce company in the U.S. is facing isn’t that complicated though. According to Amazon, it has to spend massively to grow further —and as costs add up, they are going to put pressure on gross margins.
Amazon's shipping costs rose 46% in the third-quarter, after growing 36% in Q2 and 21% in Q1, helping its gross margin to shrink 0.7 percentage points annually to 41%. For the fourth quarter, which is a seasonally weaker period for margins, the consensus is for Amazon's GM to be down further 0.5 points to 37.7%.
The company’s costs, tied to its one-day delivery service known as Prime, are what's driving up expenses. And the investment needed to dispatch merchandise in one day will continue to put a strain on earnings for the rest of the year, according to Amazon.
That situation isn’t encouraging for short-term investors who were attracted to this stock by the company’s growing profitability. Its shares, which have sky-rocketed more than 400% over the past five years, have, however, done nothing for investors in the last few months.
Trading at $1,858 at yesterday's close, Amazon's shares are down about 9% since early July, only just ahead of the worst performer Netflix (NASDAQ:NFLX) in the group of five top technology stocks known as FAANG.
h2 New Growth Areas/h2To support a bear argument, some analysts also cite Amazon’s slowing sales growth and the intense regulatory scrutiny which could force the company to alter its current business model.
But despite these trouble spots, we continue to like Amazon 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 showing some signs of peaking. But for long-term investors, Amazon is still one of the best options among high-growth technology stocks.
Challenged by slowing growth in its core e-commerce franchise in recent years, the giant online retailer needs to attract more shoppers — and the faster, one-day shipping is doing just that. If Amazon is succeeding in expanding its sales, investors shouldn’t worry about costs and a light hit on margins, in our opinion.
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Another reason we are comfortable in recommending Amazon is that the company has many other business units which make its sales base fairly diversified. Chief Executive Officer Jeff Bezos has been developing 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. Indeed, Amazon Web Services, known as AWS, grew at a rate of 35% in Q3. Amazon’s digital advertising business, another high-margin venture, is expanding at a triple-digit rate. Backed by these extremely profitable units, Amazon has been able to disrupt many industries and can continue to do so for a long time.
For Q4, analysts are expecting Amazon's subscription services revenue, which covers Prime membership fees as well as digital content services such as Music Unlimited and Prime Video Channels, to expand more than 30%, making it a meaningful contributor to its growth.
Bottom Line
Amazon's e-commerce business continues to show a blistering growth trajectory and its earnings momentum from AWS and digital advertising remains robust. These strengths make the stock attractive even at a time when cost escalation is temporarily hurting margins.
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