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Investors will be eying Amazon’s AMZN Q3 earnings report on October 27 during a busy week for big tech. Trading 36% from its highs, Amazon will give valuable insight into the state of e-commerce and cloud computing amid economic uncertainty. This will also be the company’s first earnings report since its 20-1 stock split in July.

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Wall Street will be monitoring Amazon’s ability to deal with higher operating costs as the company makes the effort to expand its Amazon Prime services. More importantly, Wall Street will have a close eye on Amazon’s Cloud services because even though most of the company’s revenue is derived from retail, Amazon Web Services (AWS) has been its most profitable segment.

AWS Significance

During the second quarter, AWS revenue was up 33% to $19.74 billion beating analysts’ estimates. However, Wall Street is concerned that AWS expansion may be slowing as both Alphabet’s GOOGL and Microsoft’s MSFT cloud services grew at a faster rate last quarter.  

AWS is still estimated to control 39% of the cloud-computing market share to make it the industry leader. Amazon’s cloud services brought in $5.72 billion in operating income in Q2, up 36% year over year. This helped the company tally $3.32 billion in total operating income during the second quarter. However, total operating income was down 57% last quarter due to higher operating costs and expansion efforts in other business segments.

Logistic costs have been high with the company facing inflationary pressures in fuel, energy, and transportation costs. This led to AMZN missing earnings expectations by 33% in Q2 at $0.10 per share despite revenue being up 7% to $121.2 billion. 

Investors hope AWS gave Amazon a stronger boost during the quarter with the company announcing new cloud provider agreements with Delta Air Lines DAL, British Telecom, and Jefferies Financial Group JEF.

Q3 Outlook

The Zacks Consensus Estimate for AMZN’s Q3 earnings is $0.23 per share, which would represent a -26% decrease from Q3 2021. Sales for Q3 are expected to be up 15% at $128.03 billion which indicates operating costs are still weighing on the company’s bottom line this quarter.

Earnings estimates for the period have declined from $0.30 at the beginning of the quarter and are down in the last week as well. Year over year, AMZN earnings are expected to decline -94% this year but rise an impressive 1,111% at $2.18 per share in FY23. Top line growth is expected, with sales projected to be up 11% this year and rise another 15% in FY23 to $600.18 billion. However, this is slower than its growth in the past.

Performance & Valuation

AMZN is down -29% YTD, near the Nasdaq’s decline to underperform the S&P 500’s -21%. Despite the YTD decline, over the last decade, AMZN is still up an impressive +900% to crush the Nasdaq and the benchmark.

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Investors hope AMZN can get back to this stellar performance as the company adapts to a tougher market environment. Trading around $120 per share, AMZN has a P/E of 126.7X. However, Wall Street has been willing to pay a premium for AMZN in the past. AMZN also trades a lot lower than its extreme high of 8,055.3X over the last decade and closer to the median of 132.1X.

Bottom Line

Amazon currently lands a Zacks Rank #4 (Sell) in correlation with downward estimate revisions for the current quarter, fiscal 2022, and FY23, as operating costs continue to weigh on earnings.

AMZN was up after missing earnings expectations last quarter due to its better than expected guidance and outlook for the current quarter. If the company misses expectations again and is not able to provide a robust outlook for FY23 Wall Street will become cautious of the stock in current economic conditions.

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