Amazon Q3 2018 earnings preview

Andrew Harrer | Bloomberg | Getty Images

Jeff Bezos, founder and chief executive officer of Amazon.com Inc., laughs during a discussion at the Air Force Association’s Air, Space and Cyber Conference in National Harbor, Maryland, U.S., on Wednesday, Sept. 19, 2018. 

Amazon is expected to show another huge jump in profits when it reports third-quarter earnings on Thursday, despite heavy investments ahead of the holiday season.

The company is expected to report third-quarter profit of $3.09 per share, or roughly $1.5 billion, according to FactSet. That would be up from the 52 cents per share reported a year earlier, and the fourth straight quarter that Amazon has topped $1 billion in profit — a remarkable milestone for a company once known for often losing money because of its heavy investments.

The widening profits are largely driven by the growth of Amazon’s high-margin businesses, including its cloud, advertising and third-party seller services. Investors will keep a close eye on how those business units performed in the third quarter.

“Focus will likely remain on the strength of Amazon’s high margin business lines that are now driving robust margin expansion,” Evercore’s analyst Anthony DiClemente wrote in a note published earlier this month.

Here’s what Wall Street is expecting:

• EPS: $3.09 vs. 52 cents per share last year, according to FactSet consensus estimate
• Revenue: $57.1 billion vs. $43.7 billion last year, according to FactSet consensus estimate
• AWS revenue: $6.7 billion vs. $4.6 billion last year, according to FactSet consensus estimate

The third quarter included Prime Day, one of Amazon’s biggest sales days of the year. Despite facing major glitches across its site, Amazon announced that this year’s Prime Day had record sales, becoming the largest shopping event in company history.

It also unveiled a bunch of new hardware devices during the quarter, including an Alexa-powered microwave and home audio systems, although many of the products did not go on sale during the quarter. With Whole Foods, Amazon continued to expand its grocery delivery service, which is now available in over 60 cities.

A minimum wage hike for its hourly workers, which was announced earlier in October, will not be included in the third-quarter results, as it will go in effect on November 1. Investors will look to fourth-quarter guidance to see what kind of impact the wage increase will have on Amazon’s overall business.

Here are some of the most important topics that could get discussed during the earnings call:

• High-margin businesses: Amazon is seeing higher contribution from its high-margin businesses, such as its cloud, advertising and third-party seller services, which is helping expand profitability to record-levels. Investors are particularly interested in Amazon’s advertising business, which some estimate to be on pace for $10 billion in annual revenue.
• Fourth-quarter forecast: The fourth quarter is the biggest sales period for Amazon because of the holiday season. But the all-important quarter could see a cut in revenue forecast because of the minimum wage increase announced this month, as well as an accounting rule change that will likely reduce Prime sales figures.
• Physical stores: Amazon has doubled down on its physical store expansion in recent months, opening multiple cashierless Go stores and the first 4-Star store. The third-quarter also marks the first full year since Whole Foods’ business has been included in the company’s earnings. Amazon now breaks out physical store sales but most of it comes almost entirely from Whole Foods.

On Wednesday, Amazon shares lost nearly 6 percent amidst a broad market sell-off during normal trading, but recovered about 1.5 percent after hours following solid earnings reports from tech bellwether Microsoft and tech-centric car-maker Tesla.