Amazon’s Spending Is Key as Investors Fixate on Profits

(Bloomberg) -- Last quarter, Amazon.com Inc. hinted that spending on investments such as data centers and warehouses would rise in 2019. The magnitude of those outlays is one of the biggest questions investors have ahead of Amazon’s first-quarter earnings on Thursday afternoon.

The answer will help determine how profitable the world’s biggest Internet retailer will be, and is a yardstick that investors have become increasingly fixated on as Amazon pushes deeper into more lucrative businesses such as cloud computing and advertising. Shares of the company rose as much as 1.1 percent in early trading.

"Investors are once again focused on investment spending and corresponding margin outlook," Robert W. Baird analyst Colin Sebastian wrote in a research note.

Amazon has historically returned relatively little in the way of profits, instead opting to aggressively invest in new markets and emerging technologies. First-quarter net income is expected to total about $2.3 billion on revenue of $59.7 billion, according to the averages of analyst estimates compiled by Bloomberg. Amazon Web Services is expected to contribute $7.67 billion in sales, up 41 percent from the same period a year ago, according to the average of four estimates.

Amazon has gained 42 percent since the market bottomed on Christmas Eve, adding almost $280 billion in market value. An upside surprise in the earnings report could boost the company’s valuation above $1 trillion, a distinction it achieved briefly last year. The options market is implying about a 5 percent move in the stock, which would put it about $15 billion shy of the 13-figure mark.

The rapid growth of AWS and advertising sales should fuel operating margin expansion throughout the year even if Amazon ratchets up spending, Stifel analyst Scott Devitt said. Those businesses will account for about 18 percent of Amazon’s revenue in the first quarter, up from about 15 percent a year ago, he estimates.

What Bloomberg Intelligence Says

"Amazon’s topline might come in-line or beat expectations, yet we see greater upside for a profit beat. Amazon’s story going forward will be profit growth, while sales gains are set to slow as it focuses on higher-margin products and services. Advertising and cloud growth should remain robust with efficiencies in core retail supporting profit growth."

--Jitendra Waral and Charles Allen, analysts

Just the numbers

  • 1Q net sales estimate $59.68 billion (range $58.30b-$60.41b); forecast $56 billion to $60 billion
    • AWS estimate $7.67 billion (4 estimates compiled by Bloomberg News)
  • 1Q GAAP EPS estimate $4.67 ($3.08-$5.70)
  • 1Q operating income estimate $3.10b (range $2.43b-$3.46b); forecast $2.3 billion to $3.3b
  • 2Q net sales estimate $62.37b ($60.88b-$64.93b)
  • 2Q operating income estimate $4.18b ($3.67b-$4.80b)

Data

  • AMZN 48 buys, 1 hold, 1 sell: Bloomberg data
  • Avg PT $2,133 (12.2% upside from current price)
  • Implied 1-day share move following earnings: 4.6%
  • Shares rose after 7 of prior 12 earnings
  • GAAP EPS beat estimates in 10 of past 12 quarters

Timing

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