The current Q4 earnings season could be filled with anxiety for Amazon (AMZN) investors.
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With shares trading close to their all-time highs, and with Amazon having something of an inflection point after the excellent Q3 results, the Seattle-based online marketplace giant will need to report holiday period results that prove once again—especially in its cloud segment—that sales growth and margin expansion are viable milestones. As a long-term Amazon bull, I remain optimistic about the company’s prospects ahead of Q4 results scheduled to be reported on January 30. Ultimately, I think short-term price gyrations shouldn’t spook well-positioned bulls carrying long-term positions in Amazon.
Recent price action shows Amazon stock rising throughout 2024 to stand almost 46% higher than last year.
Amazon’s Glowing Metrics Set the Stage
Before going into why I’m cautiously bullish heading into Amazon’s Q4, let’s first review what happened in Q3. In its September quarter, Amazon reported solid results, beating the market’s rather demanding expectations, followed by a consistent period of strong growth fueled by AI.
In addition to beating expectations across the board, Amazon achieved an 11% year-over-year sales increase to $159 billion, above the guidance for Q3, which pointed to revenues at a midpoint of $156 billion.
However, the main highlight was Amazon Web Services (AWS) unit, the company’s highest-margin segment. Amazon’s cloud service segment achieved $27.4 billion in revenues compared to $23 billion in the same period last year, an annual increase of 19%. In addition, operating margins stood at a robust 38% following volatility throughout 2024. For example, in Q1, AWS’s operating margins stood at 37.6%, while in Q2, they fell to 35.5%.
According to Amazon’s management team, this upturn in margin growth, which was a significant point of concern for analysts before Q3, was explained by reasons such as (1) better staffing efficiency, (2) extending the useful life of servers in 2024, and most importantly, (3), higher demand at the top line, which led to improved cost efficiencies and profitability.
Of course, Amazon is not all about cloud computing. The remaining segments, which make the company highly diversified, such as third-party sellers, advertising, and subscriptions, all achieved double-digit growth rates—except for its online and physical stores, which grew at 8% and 5%, respectively.
Stakes Are Raised Ahead of Q4 Earnings
Even though Amazon’s December quarter looks quite promising, the company’s bar is reaching higher. Much of this is because the more conservative pre-Q3 expectations have likely been priced in (to an extent), considering that Amazon shares have jumped ~20% since the consistent Q3 results that vastly pleased the market.
Meanwhile, analysts are projecting that Amazon will earn $1.48 per share in Q4, implying growth of 48% year-over-year. Revenues are expected to hit $187.3 billion, a record for the company, representing growth of 10% year-over-year. These estimates, however, have mainly been revised upwards in the last three months, as 34 out of 35 analysts have revised EPS projections upwards, while 31 out of 40 have raised their revenue projections.
With the bar set higher, Amazon must prove it can surprise the market again. Given the narrative preluding these results, AWS will likely be at the forefront of how analysts digest Amazon’s broader performance. The big challenge is maximizing sales growth rates while keeping margins on trend — aspirations that may not be sustained over the long term. For example, AWS sales growth has been accelerating, rising from 12% to 19% over the last four quarters, and the company maintained its leadership in the cloud market with a 32% share.
In my view, indications are that Amazon will outperform by announcing a continued growth spurt at AWS, along with robust margins that serve up confidence to forward-looking analysts. According to Amazon’s CEO Andy Jassy, the macroeconomic backdrop pushes companies to optimize costs and drives AWS adoption as businesses bolster their focus on modernization, such as cloud computing.
Volatility in AMZN Stock Signals Danger
Although I’m primarily bullish on Amazon ahead of its Q4 earnings, on the flip side, there are palatable concerns about volatility in its margins. Going further back, in Q2, much of the muted reaction to Amazon’s stock post-earnings was due to a decline in AWS operating margins (from 37% to 35%), with the market finding it challenging to accept a softer outlook on margins going forward. There’s a real possibility this could recur in Q4 or extend into Fiscal 2025.
As hyperscalers like Microsoft’s (MSFT) Azure and Alphabet’s (GOOGL) Google Cloud have provided intense competition to the leadership position of AWS, Amazon’s margins tend to come under pressure as pricing power plays a role.
On the bright side, Amazon’s operating income should remain strong, at least in Q4. The company has provided guidance for Q4 operating income between $16 billion and $20 billion. If the mid-range estimate of $18 billion is achieved, it would represent a 3.5% annual increase, and if the top-range is achieved, it would represent a 15% annual increase—which would likely send AMZN bears into hibernation.
Is Amazon Stock Expected to Rise?
Supporting my bullish outlook for AMZN, among the 49 Wall Street analysts covering the stock, all but one neutral analyst has issued a Buy recommendation. As a consensus, market analysts have placed an average price target of $251.35 per share on AMZN, which implies an upside potential of 11.25% from current prices of ~$225.
Amazon Bulls Hold Steady as Q4 Results Loom Large
Amazon gave investors good reason to be bullish ahead of Q4, as last quarter proved bears wrong by projecting more conservative sales and margin growth in its most profitable segment, AWS. Although there were optimistic reviews for Q4, I believe the market volatility to come, regardless of whether it reflects bearish or bullish sentiment, will primarily rely on whether AWS sales growth rates and operating margins are sustained.
While short-term market volatility may occur due to Amazon’s mixed metrics, including mixed margins, from a long-term perspective, I doubt we will see news to counter the Amazon growth story based on solid fundamentals heading into 2025. As momentum peaks across most of its business units — especially its leading cloud business, which is most sensitive to AI demand growth — I am strongly bullish on AMZN stock without any anxiety.
