Amazon (AMZN) is navigating through a challenging landscape as it heads into its third-quarter earnings report set for Thursday. The company is dealing with the aftereffects of a significant AWS outage last week and the announcement of 14,000 layoffs on Tuesday. However, the primary focus for investors remains squarely on artificial intelligence (AI).
Analysts at William Blair, Dylan Carden and Arjun Bhatia, pointed out that Amazon is trying to counter a narrative indicating it is lagging in the AI race, which has dampened growth expectations and stock performance. Year-to-date, Amazon shares have increased by a modest 4%, a stark contrast to its competitors in the cloud sector, such as Google’s parent company Alphabet (GOOGL) and Microsoft (MSFT), whose stocks have surged by 40% and 27.5%, respectively.
Investors are particularly concerned that Amazon Web Services (AWS) is losing ground to Microsoft and Google as the demand for AI-driven computing power escalates. Despite AWS being the overall market leader, the recent quarterly performances have shown that Azure and Google Cloud are quickly catching up, raising concerns about AWS’s growth trajectory. This dynamic contributed to a sell-off in Amazon’s stock following its second-quarter earnings report in July.
Sales growth in the AWS segment is a critical metric for the company’s performance. Analysts anticipate that AWS sales for the quarter will reach $32.4 billion, reflecting a growth rate of 18.1%, which is only a slight increase from the previous quarter’s 17.5%. Nevertheless, the analysts mentioned that even a modest acceleration in AWS’s growth would be welcomed by investors in the near term.
Moreover, discussions surrounding tariffs on Amazon’s extensive e-commerce business have mostly been overshadowed by the AWS narrative. Notably, Amazon’s North America segment, which constitutes approximately 60% of its total sales, is a focal point. CEO Andy Jassy’s insights regarding the impact of tariffs will be closely monitored. He has previously mentioned that there hasn’t been a significant increase in prices or a noticeable drop in consumer demand.
For the North America division, analysts project sales to hit $105.1 billion, signifying a year-over-year growth of 10%. Bank of America analyst Justin Post noted that aggregated credit and debit card data indicates a growth in online spending during the third quarter, suggesting that Amazon may be outperforming Wall Street estimates in its retail operations.
Overall, analysts predict Amazon’s earnings for the September-ended quarter will be $1.57 per share, reflecting a year-over-year increase of 10%, while sales are anticipated to rise 12% to $177.91 billion. The guidance for holiday quarter sales will also be a key area of interest, with analysts forecasting Q4 sales to reach $208.35 billion.
On the stock market front, Amazon shares have shown positive momentum, recently trading at around 230.70. The stock has gained in seven of its last eight sessions and is currently forming a cup base with a buy point of 238.85. According to the IBD Stock Checkup tool, Amazon holds an IBD Composite Rating of 88 out of 99, indicating that it remains a strong contender among growth stocks.
Overall, while facing certain hurdles, Amazon’s foundational elements, especially in retail and AI, suggest potential for future growth. The anticipation surrounding their upcoming earnings report may provide insights that reassure investors and could bolster confidence in the company’s trajectory.