Amazon Q3 earnings preview: Where next for AMZN stock?

When will Amazon report Q3 earnings?

Amazon will release third quarter earnings after the markets close on Thursday October 27. Management will hold a conference call on the same day at 1430 PT.

Amazon Q3 earnings consensus

Amazon has said net sales will be between $125.0 billion to $130.0 billion in the third quarter and given itself leeway when it comes to profits after stating operating income will be between breakeven and $3.5 billion.

Wall Street forecasts that Amazon will report a 15% year-on-year increase in net sales to $127.64 billion in the third quarter. Operating income is expected to drop 36% to $3.12 billion and diluted EPS is expected to come in at $0.28, down 11% from last year.

Amazon Q3 earnings preview

Amazon continues to power ahead and deliver buoyant levels of sales growth despite the shaky outlook for the economy and evidence of a pullback in consumer spending. In fact, the double-digit revenue growth pencilled-in for this quarter will be more than double the rate we have seen in the previous two. That will be partly down to the fact that this quarter will be easier as tough comparatives spawning from the boom in demand during the pandemic start to fall away, leading to faster sales growth and a milder decline in earnings.

Another reason for faster topline growth is the fact its Prime Day sale was held in the third quarter, whereas last year it was held in the second. That is expected to contribute toward an 8.1% rise in sales from its core ecommerce operation and a 17% lift in revenue from the array of services it provides to third-party sellers on its platform.

Its subscription services, underpinned by Prime, are expected to remain strong with Wall Street pencilling-in a 13% rise in revenue this quarter. Prime appears to be a major advantage by keeping customers within its flywheel strategy and encouraging members to keep shopping on the platform even if they spend less elsewhere.

Notably, Amazon recently held its Prime Early Access sale ahead of the Black Friday and Cyber Monday events in November, all of which should come into play in the fourth quarter. However, the anticipated boost from this additional sale is not expected to be as great in the fourth quarter as the Prime Day sale will have on the third. Initial analysis suggests the event failed to provide the blockbuster figures that Amazon had hoped for. ‘This Prime [Early Access] Day seemed to be mostly just another day on Amazon,’ said CEO of data analysis firm Klover, Brian Mandelbaum. He added that households spent around 40% less at this event than the Prime Day back in July. Separate data from research firm Numerator said the average basket dropped to $46.68 from over $60 at the summer event.

Elsewhere, Amazon’s relatively small but fast-growing advertising business is expected to report a 24% rise in revenue in the third quarter, which would be welcomed considering the softness seen by the biggest players in the industry, particularly social media companies that are seeing growth stall to record lows.

Meanwhile, Amazon Web Services, the largest cloud computing company in the world and the jewel in the crown of the company considering it generates the bulk of its profits, is forecast to deliver another impressive 30% growth in sales this quarter to $21.0 billion. It will be almost solely responsible for Amazon’s profit again considering analysts believe the unit’s operating profit will jump 25% to $6.1 billion before being dragged down by its other loss-making ventures.

Regionally, North America is expected to drive topline growth in the quarter with revenue from the area forecast to rise over 17%, helping counter the tepid 0.5% growth expected from its international arm.

The topline may continue to grow but profits are under pressure as Amazon grapples with rising costs, which are forecast to be 18% higher in the third quarter than a year ago, and the unfavourable strength of the dollar. However, it is making an effort to limit the costs that it can control and said costs would be some $1.5 billion lower this quarter than the previous one, with a particular focus on its fulfilment network.

Still, Amazon has long been willing to sacrifice profitability in favour of growth and gaining market share with a view of reaping rewards later down the line. We have seen operating profits fall dramatically since peaking in early 2021, although Wall Street remains hopeful this can start to rebound again as we enter the busy holiday shopping season in the fourth quarter and that the third will be the trough.

The outlook for the busy holiday shopping season in the fourth quarter will prove influential. Wall Street is looking for Amazon to target net sales of $155.5 billion and operating profit of $4.7 billion in the final three months of 2022.

(Source: Estimates from Bloomberg)

Where next for AMZN stock?

Amazon shares have rebounded since closing at a three-month low on October 14, with the stock currently testing the 100-day moving average and their highest level in almost three weeks today.

The stock, should it keep up the momentum, could continue to climb toward $126 before facing its next test, with this level having proven to be a tough ceiling to crack between May and July before re-emerging as a level of support during September. A break above here would bring $137.30 into play, in-line with the floor during the first four months of 2022.

Notably, the 52 brokers that cover Amazon remain extremely bullish on the stock following the heavy selloff this year with an average target price of $167, implying the stock can rally almost 40% from current levels and return to a price not seen since last April.

Any renewed pressure could see Amazon shares slide back toward the three-month low of $106.90, which must hold to avoid bringing $102 – the two-year low that emerged as a floor in May and June – back into play. Any slip here is likely to see Amazon shares sink below the $100 mark for the first time since April 2020.

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