Amazon Earnings: “The good news is that consumers are still spending. The bad news is they don’t spend on e-commerce.”

Money is still flowing despite concerns about the economy, but Wall Street is left wondering how much of that money is being spent on Amazon.com Inc.

“The good news is that consumers are still spending,” DA Davidson analyst Tom Forte told MarketWatch. “The bad news is they don’t spend on e-commerce.”

If Amazon AMZN,
+3.53%
reports third-quarter results on Thursday afternoon, investors will find out if those concerns are warranted. This concern is largely based on perceived slowing demand for online shopping as customers save on spending on “revenge trips” and concerts, or on food and gas bills amid decades of high inflation.

Retailers across the US are slashing prices to eliminate overstocked inventories following supply chain delays and consumers shifting to basics who left stores with loads of unwanted clothing, electronics and out-of-season merchandise. According to Forte, Amazon’s decision to hold a second Prime Day shopping event this year suggests the online retailer may be grappling with similar issues.

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“One interpretation of this event is that Amazon needed the ability to offload some excess inventory, or provided the ability for the third-party sellers on its platform to do so,” he said.

However, Sucharita Kodali, an analyst at Forrester Research, told analysts at DA Davidson that Amazon has redesigned Prime Day every year, according to a research note this week. And she said the decision could help Amazon by dragging typical holiday sales into October and “[mitigating]the impact of competitors’ promotions in November and December.”

The Amazon fears don’t end with online shopping, however. As Amazon grows internationally, the stronger dollar will cause problems. There’s also the question of whether big entertainment investments – like Thursday Night Football and The Lord of the Rings: The Power of the Rings – will pay off. And as the winter holiday season creeps further into fall each year, analysts will likely be on the lookout for clues that consumers are becoming more cautious.

Demand for Amazon’s AWS business, Forte said, could be fueled by companies’ efforts to save money on technology as they grapple with their own soaring costs. But he questioned the company’s efforts to monetize the NFL with Thursday Night Football and The Rings of Power, an adaptation of JRR Tolkien’s fantasy novels.

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Various media reports put the cost of publishing The Rings of Power – a prequel series to Tolkien’s books available on Amazon Prime – at anywhere from $715 million to over $1 billion. Amazon’s 11-year deal to bring Thursday night soccer games to Prime Video this year will reportedly cost around $1 billion a year.

But after Amazon increased its U.S. Prime membership fee by $20 this year to offset rising costs, Forte said he wonders how many Amazon shoppers end up gravitating towards football and fantasy.

CNBC reported that Amazon’s first football game on Thursday night saw record Prime signups in just a few hours. While the Rotten Tomatoes critic rating for “Rings of Power” is 85%, the average viewer rating for the series is 39%.

“I expect Amazon will be as excited as they can be about Lord of the Rings and Thursday Night Football because they’re huge investments,” Forte said. “But I think they run the risk of losing subscribers to Prime. They don’t want to pay $20 more if they’re not Tolkien fans or aren’t football fans.”

Still, Wall Street expects Amazon to turn a profit in the third quarter after posting back-to-back quarterly losses on rising costs and its investment in troubled electric vehicle maker Rivian Automotive Inc. RIVN.
+3.87%.
And Amazon’s AWS cloud services business is expected to remain a bright spot on the company’s income statement.

But after two straight losses, the results will come in as Amazon seeks to streamline operations amid fears of a recession. Earlier this month, The New York Times reported that Amazon would suspend hiring of enterprise-level employees at its retail store. Amazon has also pulled back from opening new facilities, some data shows, and halted testing of a home delivery robot, according to reports from Bloomberg.

What to expect

Merits: Analysts polled by FactSet expect Amazon to earn 22 cents a share in the third quarter, compared to 31 cents in the year-ago period. Contributors to Estimize — a crowdsourcing platform that collects estimates from Wall Street and buy-side analysts, fund managers, company executives, academics, and others — forecast earnings averaging 26 cents per share.

Amazon reported losses in the first and second quarters after Rivian’s share price fell steadily this year. Amazon’s first-quarter loss was its first in seven years.

Revenue: Analysts are expecting net sales of $127.49 billion for the third quarter, up from $110.81 billion a year ago, according to FactSet. It is estimated that the contributors are expecting $127.88 billion in revenue.

Stock price: Amazon stock is down 30% so far this year. This is worse than the S&P 500 Index SPX,
+2.37%,
that’s down 23% year-to-date.

What Analysts Say

Amazon is trying to rein in amid signs more reluctant holiday shoppers are getting less for their money. Analysts at Deloitte said this week they expected rising prices to tame consumer holiday buying. They expect roughly flat year-over-year vacation spending averaging $1,455 per customer this year — an amount that reflects spend on gifts, non-gift purchases, and things like entertainment. But they also said shoppers wanted to buy nine gifts for family and friends this year, compared to 16 last year.

Some analysts are positive about Amazon’s cuts. UBS analysts lowered their target price from $180 to $165 ahead of the report but maintained a buy rating, writing, “The broader arc is one of more discipline, greater efficiency and higher margin.”

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“We continue to see margin improvement from Amazon, driven by (1) higher Prime, Fulfillment by Amazon, fuel surcharges and holiday shipping surcharges, (2) lower energy costs (~20% of shipping costs) and falling freight costs, (3) Rationalize FC capacity (approximately 10% of space has been closed/cancelled/moved), (4) reduce employee oversupply, reflected in return of seasonal hiring bonuses and higher wages, (5) be more disciplined about growth investments (closing physical stores, cut Amazon Care, reduce Grand Challenge),” they wrote.

Aside from e-commerce, UBS analysts also see margins supported by continued growth at Amazon Web Services and Amazon’s growing advertising business, both of which generate higher margins than the retail business.

“We believe this trend is reflected in the Q3 and Q4 outlook and supports a multiple expansion in AMZN shares,” they wrote.

The fourth-quarter outlook may be the most important piece of information Amazon executives provide for the stock’s price. According to FactSet, on average, analysts expect $155.35 billion in holiday season revenue to go into the report.

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“We are most focused on the fourth quarter guidance following Amazon’s Prime Early Access sale in mid-October and our view that overall operations will become more efficient,” wrote Citi analysts, who have a Buy rating and a $185 price target on the stock have, in a preview. “Of the $2.5 billion of Amazon’s $6 billion in incremental spending in Q1 expected through the end of Q3, we relate mostly to inflation costs and FC efficiencies given the improvement shipping and transportation costs, as well as increased FBA fees (which somewhat offset inflationary pressures), we’re looking to make further progress here for 4Q.”

Overall, 47 of the 52 analysts tracked by FactSet rate Amazon stock the equivalent of a buy, while four rate it as a hold and just one rate one stock as a sell. The average target price as of Friday morning was $163.29.

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