Amazon Q2 earnings preview

After spending $800 million in recent months to speed up package delivery, Amazon is seeing some signs of growth acceleration, at least from the first quarter.

In Amazon’s second-quarter earnings report, set to hit after Thursday’s closing bell, analysts expect revenue of $62.5 billion, up 18.1% from the year-earlier period, according to Refinitiv’s analyst consensus estimates. That would be an improvement from 16.8% in the previous period, which was Amazon’s slowest expansion in four years.

At well over $200 billion in annualized revenue, Amazon is already the fifth-biggest U.S. company by sales. It also commands the second-highest market cap. With that kind of scale, growth typically becomes hard to find. But Amazon is anything but typical, having poured money into physical stores, electronic devices, original Hollywood content and the massive cloud-computing operation that makes up Amazon Web Services.

To get more juice out of its core retail operation, Amazon said in April it expected to spend $800 million in the second quarter improving warehouses and delivery infrastructure as part of a plan to make one-day shipping the standard for Prime members. Analysts predict that shorter delivery times will lead to more frequent purchases.

It’s just the latest example of CEO Jeff Bezos’ willingness to sacrifice profit margins for growth.

“Investments in one day shipping should help top line growth rebound,” analysts at Canaccord Genuity wrote in a note this week. “We look for lower margins but concurrently expect a growth re-acceleration that we think can keep the stock in favorable territory.”

Amazon shares have climbed 33% this year, outpacing the 20% gain for the S&P 500.

Here’s what Wall Street is expecting for the quarter:

• EPS: $5.57, according to analysts surveyed by Refinitiv, vs. $5.07 last year

• Revenue: $62.5 billion, according to Refinitiv, vs. $52.9 billion a year ago

• AWS: $8.5 billion, according to analysts surveyed by FactSet, vs. $6.1 billion last year

Still, investors are keeping a close eye on how much Amazon’s heavier investment will weigh on profitability, which has reached record levels because of AWS. In the first quarter, Amazon reported $3.6 billion in net income and operating profit of $4.4 billion. Its operating margin rose to 7.4% from 3.8% a year earlier. During last quarter’s earnings call, Chief Financial Officer Brian Olsavsky hinted the company’s profits could take a hit this year because it expects to get back into an investment cycle following a slower spending period.

“We are cautious on [operating income] for 2Q and 2019 in general based on management’s commentary that this year will return to normal pace of investment,” analysts from Barclays wrote in a note earlier this month.

Here are some of the main topics analysts expect to hear about on Thursday’s call:

• One-day delivery: Amazon is expected to continue investing in its warehouse and shipping logistics expansion throughout the year, on top of the $800 million spent last quarter. John Blackledge of Cowen estimates one-day delivery to bolster Amazon’s revenue by up to $2 billion this year.

• Regulation: Amazon is now facing heavier regulatory scrutiny, with antitrust officials in the U.S. and EU launching investigations into the company’s business practices. While it’s still early in the process, the probe could cause Amazon to be less aggressive, certainly when it comes to acquisitions, according to Jake Dollarhide, CEO of Longbow Asset Management, which counts Amazon as its biggest holding. “The Federal Trade Commission is going to be increasingly scrutinizing any deals Amazon brings to the table,” Dollarhide said. “They’re going to have to do small, seemingly insignificant deals, but nothing on the scale of Whole Foods.”

• Prime Day: Amazon set another sales record during this year’s Prime Day, its biggest shopping event of the year. The results of the two-day sales promotion, however, won’t show up until the third quarter, so investors will pay close attention to guidance to get a sense of what kind of numbers Amazon produced. Investment firm Jefferies wrote in a recent note that Amazon likely sold almost $4 billion worth of products during Prime Day, increasing “our confidence in solid Q3 Net Sales guidance.”

• AWS slight slowdown: Amazon’s AWS business is expected to report 39% revenue growth in the second quarter, dipping below 40% for the first time since disclosing that figure in 2014. Given AWS’ sheer size — it’s on pace to exceed $30 billion in revenue this year — the growth slowdown is somewhat expected. But investors want to hear how the company is fairing against competitors Microsoft and Google. “Investor sensitivity on the AWS growth and margin trend-line could heighten in 2020 as the multi-cloud narrative with Google Cloud and Microsoft Azure builds,” KeyBanc Capital’s Ed Yruma wrote in a note this week.

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