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Will Amazon's (AMZN) Q3 Earnings Benefit From Prime & AWS?

Zacks Equity Research

Amazon AMZN is scheduled to report third-quarter 2019 results on Oct 24.

The company surpassed the Zacks Consensus Estimate in three of the trailing four quarters, with the average positive earnings surprise being 34.02%.

Q3 Estimates & Guidance

We note that the Zacks Consensus Estimate for third-quarter 2019 earnings currently stands at $4.46, up by 5 cents over the past 30 days.

Further, Amazon expects net sales between $66 billion and $70 billion. The figure is anticipated to improve in the range of 17-24% on a year-over-year basis. Management projects an unfavorable impact of approximately 30 bps from foreign exchange rates.

Further, the company expects costs related to its one-day shipping to have accelerated in the third quarter.

Notably, the Zacks Consensus Estimate for net sales is pegged at $68.6 billion.

Past-Quarter Highlights

In second-quarter 2019, Amazon delivered earnings of $5.22 per share, surging 3% from the year-ago quarter. However, the figure missed the Zacks Consensus Estimate by 7 cents.

Meanwhile, net sales of $63.40 billion comfortably surpassed the Zacks Consensus Estimate of $62.569 billion, exhibiting year-over-year growth of 20%.

Let’s see how things are shaping up prior to this announcement.

Amazon.com, Inc. Price and EPS Surprise

 

Amazon.com, Inc. Price and EPS Surprise

Amazon.com, Inc. price-eps-surprise | Amazon.com, Inc. Quote

Prime & Retail Initiatives: Key Catalysts for Q3

Amazon growing retail initiatives are expected to have contributed to the third-quarter results. Moreover, Prime’s strengthening grocery services, expanding international footprint and original content portfolio are likely to have aided its adoption rate in the third quarter.

During the to-be-reported quarter, the company rolled out AmazonFresh service, which enables Prime members to receive delivery of daily essential goods and grocery items within two hours, in Indianapolis, Houston, Minneapolis and Phoenix. This move helped Amazon in expanding this particular service further in the United States.

Further, the company’s expanding two-hour delivery service of natural and organic products from Whole Foods Market across the U.S. cities is expected to have gained traction across customers during the quarter under review.

Furthermore, the company’s pilot project, which is based on purchase data of Prime shoppers at Whole Foods, has helped Amazon offer the same products on its online platform with free two-hour delivery during the third quarter. The program is reportedly available in almost 30 cities.

Additionally, growing momentum across Prime Free One Day service, which is Amazon’s free one-day shipping service, is anticipated to get reflected in the third-quarter results.

We believe strengthening delivery system of Amazon is expected to have continued to provide competitive edge against retailers like Walmart WMT, Target TGT and Kroger KR in the third quarter.

Additionally, the company unveiled Prime subscription services in Brazil in order to strengthen presence in Latin America. The move is anticipated to have aided Amazon Prime’s international presence and consequently contributed to its subscriber base in the third quarter.

Further, Amazon tried to bolster its retail business further by making Lady Gaga’s beauty brand, Haus Laboratories available on its e-commerce site in the third quarter. This move is anticipated to have attracted customers to its platform.

Additionally, the company acquired INLT that develops software that helps in custom clearance and, management and reduction of costs related to imported goods. This simplifies the process of cross-border shipments for the online merchants. This is likely to have attracted more sellers to Amazon’s platform in the third quarter.

Strengthening AWS Services

In the quarter under review, AWS announced the general availability of several services like Amazon Forecast, AWS Lake Formation, Amazon Quantum Ledger Database and AWS IQ. Further, AWS made its new GPU-powered Amazon Elastic Compute Cloud (Amazon EC2) instance, G4 instances, generally available. These moves are expected to reflect in the company’s third-quarter results.

Notably, expanding services portfolio is likely to have won customers, which in turn is likely to get reflected in AWS’ revenues in the cloud market in the third quarter.

Expanding Smart Devices Portfolio

During third-quarter 2019, Amazon launched 5 Echo smart speakers namely – All-new Echo, Echo Flex, Echo Dot with clock, Echo Show 8 and Echo Studio.

Further, it unveiled a wireless earbud with Bose Active Noise Reduction Technology and hands-free access to Alexa called Echo Buds. Additionally, Amazon introduced Alexa enabled prescription-ready glasses and a smart ring namely Echo Frames and Echo Loop, respectively.

Additionally, Amazon unveiled Eero mesh Wi-Fi router with inbuilt Alexa. Moreover, it introduced voice-controlled Amazon Smart Oven with built-in Echo Dot. Further, the company added more user friendly and advanced features to Alexa.

All these smart devices and new Alexa features is likely to have aided in delivering better user experience and consequently the third-quarter results.

Rising Costs

Amazon’s rising transportation and fulfillment center costs related to its free one-day shipping service are likely to have negatively impacted the third-quarter profits.

Currently, Amazon carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Stong Buy) stocks here.

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