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Amazon (AMZN) Earnings After The Bell Thursday: Can The Cloud Make AMZN Fly?

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Earnings excitement is peaking this week as the biggest public companies release their Q2 financial results. The remaining FANG stock are reporting this week and everyone, and their cousin has an eye on Amazon (AMZN - Free Report) , which is releasing their Q2 results after the bell Thursday, July 25th.

Amazon analysts are estimating an EPS of $5.29, which would represent 4.3% year-over-year growth. Sales are expected to be $62.57 billion, which would illustrate an over 18% topline appreciation.

AMZN has had large moves in past earnings, but the price action is usually kept to a few percentage points. Amazon has beat their last 7 EPS estimates but only had a positive price action in 3 of those. Revenue figures and management guidance tend to be a better indicator of AMZN’s price impact than EPS.

The Cloud

Most people would assume that Amazon, the largest online retailer in the world, is driving profits with their e-commerce business. Surprisingly this assumption is incorrect. Amazon’s cloud segment, AWS, has recently become the firm’s biggest profit driver with the demand for this technology proliferating.

AWS was an early mover in the cloud space and has been able to take control of the largest market share in the cloud businesses coined infrastructure as a service (IaaS) and platform as a service (PaaS).

AWS has seen over 40% year-over-year growth since 2014 and is expected to be Amazon’s primary growth-driving segment in the years to come. This quarter AWS is expected to grow revenue by 39% and expand its profits by 41% from Q2 last year. Look for AWS sales of $8.49 billion and operating income of $2.31 billion.

The cloud segment has become increasingly competitive, as more and more firms enter the space the fight for market share is accelerating. Microsoft’s (MSFT) Azure is quickly acquiring market share with its triple-digit to high double-digit growth rates since it gained traction in 2015. Azure is still not profitable because of the fierce price competition that has been pinching margins. Other prominent competitors include Salesforce (CRM - Free Report) , Google (GOOGL - Free Report) Cloud, and IBM (IBM - Free Report) Cloud.

Look for margin expansions in Amazon’s AWS segment in this earnings release.

Recent Performance

Amazon shares have appreciated 32.7% so far in 2019, outpacing the S&P 500’s 18.3% returns. The stock has shown long-term investors prolific growth, with its 5-year return exceeding 500% and its 10-year growth is over 2220%. Expectations remain strong for AMZN and analysts have continued to raise EPS expectations, positioning this stock as a Zacks Rank #2 (Buy).

AMZN is being valued at 60.1x forward P/E, miles above any close competitor. This is due to the substantial growth that is being priced into the company. Forward PEG is a better indicator of value because it adds expected growth into the valuation. AMZN is trading at a 1.8x PEG which is actually below the average PEG of the S&P 500 which sits at 1.9x. The stock is trading the lowest end of its 5-year valuation trend.

Take Away

Amazon Q2 earnings release is one of the most anticipated reports of this earnings season. Jeff Bezos has taken this company from a bookstore in his garage to the largest online retailer and a leader in cloud computing.

Investors are expecting to see an EPS beat with analysts consistently setting conservative estimates. A miss would likely lead to negative price action. Topline growth has been a key indicator of price movement, so pay close attention to that figure. Management guidance and sentiment could also drive AMZN one way or the other.


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