Amazon earnings: Record holiday quarter expected as investors watch impact of 1-day shipping

(GeekWire Photo / Kevin Lisota)

Amazon will report quarterly earnings Thursday afternoon. Analysts expect a record holiday quarter with $86.15 billion in revenue, up 19 percent, and adjusted earnings of $7.02 per share, down from $8.28 a year earlier.

Investors will be eyeing the online retailer’s costly 1-day delivery initiative and its impact on margins. The company said it would spend $1.5 billion during its fourth quarter to roll out 1-day shipping, which is replacing the traditional 2-day core Amazon Prime membership benefit. That’s nearly double what Amazon spent in the second quarter, when it announced the expansion.

“Amazon is still working out the kinks in one-day Prime shipping,” said Daniel Elman, an analyst at Nucleus Research. “There is an ongoing ‘race to 0’ for the fastest shipping driven by aggressive pressure from retail competitors and shipping carriers alike, and it is causing headaches for all involved. If these shipping costs eat too much into the already low margins, Amazon would need to see significantly higher sales numbers in order to turn profit.”

In a research note, RBC Capital Markets analyst Mark Mahaney said he expects shipping costs to cut into both gross and operating margins during the fourth quarter.

But Mahaney also said in September that Amazon can generate up to an additional $24 billion in total annual revenue from the 1-day shipping service.

An Amazon Prime truck heads north on Interstate 5 in Washington. (GeekWire Photo / Kurt Schlosser)

Amazon Web Services will also be in the spotlight again. Analysts expect $9.8 billion in revenue for the quarter, up 32 percent. The cloud computing arm has helped Amazon turn a profit for several quarters, but increasing competition and slowing growth rates are top of mind. Amazon lost to Microsoft on a lucrative Department of Defense cloud contract, also known as JEDI, during the fourth quarter.

Investors will keep an eye on the company’s growing advertising arm as well, with Amazon taking on juggernauts including Facebook and Google in the online ad market.

Shares fell 8 percent after the company’s third quarter report missed profit expectations. The stock is up 16 percent over the past year, which trails other tech giants such as Apple (110 percent) and Microsoft (63 percent), as well as the SP 500 (24 percent). Amazon shares were trading at around $1,858 on Thursday; RBC’s Mahaney has a 12-month price target of $2,500.

Amazon has a market capitalization of about $920 billion. Stay tuned for coverage of Amazon’s earnings later today.

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