A monitor displays Amazon.com Inc. stock information at the Nasdaq MarketSite in New York, U.S. (Photographer: Jeenah Moon/Bloomberg)

Amazon’s Earnings Will Be Key in an Ugly Month for Tech

(Bloomberg) -- The worst month in nearly a decade for technology stocks has investors paying extra attention to Amazon.com Inc.’s third-quarter earnings report on Thursday.

Amazon is the second-best performing megacap tech stock this year, with a 48 percent gain that trails only Netflix Inc. While the web retailing giant is expected to say that revenue grew 30 percent from the year-earlier period, Wall Street is more focused on the profitability of key businesses including cloud computing, advertising and third-party retailing. Shares of Amazon rose 3.8 percent at 10:14 a.m. in New York as tech and Internet names led a rebound in the broader equities market.

“The highest-margin businesses are simply growing so fast that Amazon is either not able or not willing to reinvest enough to offset the margin expansion,” Macquarie analyst Benjamin Schachter wrote in a research note.

After outperforming for most of the year, technology stocks have been hammered amid a resurgence of market volatility in October. A basket that tracks shares of Facebook Inc., Amazon, Netflix and Google parent Alphabet Inc., has tumbled 12 percent in October, the worst month since at least 2012. Alphabet also reports earnings on Thursday after the markets close.

Wall Street is projecting Amazon Web Services revenue of about $6.7 billion in the third quarter, based on the average of four analyst estimates compiled by Bloomberg. That’s up 45 percent from the same period a year ago.

Strength in web services and advertising essentially puts Amazon “in a unique position to be as profitable as it chooses,” Wedbush analyst Michael Pachter wrote in a research note. He said Amazon’s operating income, which excludes depreciation and amortization, could exceed analyst estimates and come in at the high end of the company’s forecast of $1.4 billion to $2.4 billion. Analysts surveyed by Bloomberg expect $2.13 billion, on average.

Amazon briefly exceeded a market valuation of $1 trillion last month but has since fallen more than 15 percent. Goldman Sachs sees “meaningful potential” for the shares to continue to outperform as the company generates returns on cash invested at a rate that exceeds peers and other sectors, analyst Heath Terry wrote.

Just the numbers

  • 3Q GAAP EPS $3.11 (range $2.25 to $4.40)
  • 3Q net sales estimate $57.07 billion (range $55.74 billion to $58.08 billion); forecast on July 26 of $54 billion to $57.5 billion
  • 3Q operating income estimate $2.13 billion (range $1.73 billion to $2.55 billion); forecast $1.4 billion to $2.4 billion
  • 4Q net sales estimate $73.78 billion (range $71.37 billion to $75.78 billion)
  • 4Q operating income estimate $3.90 billion (range $3.18 billion to $4.67 billion)

Data

  • 47 buys, 2 holds, 1 sell
  • Average price target $2,149 (25 percent upside from current price)
  • Implied 1-day share move following earnings: 8.5%
  • Shares rose after 8 of prior 12 earnings announcements
  • GAAP EPS beat estimates in 9 of past 12 quarters
  • Shares down 2.8 percent in past 5 days vs S&P 500 Index down 3 percent
  • Shares up 77 percent in past 12 months vs S&P 500 Index up 5.1 percent

Timing

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