Amazon (NASDAQ:AMZN) is scheduled to announce its Q3 results after Thursday’s (October 26) closing bell. The tech giant currently operates amid a challenging macro economy as it wrestles with lower consumer and enterprise spending, inflation, and rising interest rates. Despite these near-term headwinds, though, I remain bullish on Amazon stock due to its leadership position in several business segments, widening profit margins, and expanding addressable market.
Considering these factors, let’s see how Amazon is expected to perform in the September quarter.
Amazon Forecast to Report Revenue of $141.59B, High EPS Growth
According to Wall Street, Amazon is forecast to report revenue of $141.59 billion and adjusted earnings per share of $0.58. In the year-ago quarter, the tech giant reported revenue of $127.1 billion and adjusted earnings of $0.28 per share. So, analysts expect sales to grow by 11% and earnings to more than double in Q3 of 2023.
E-Commerce Sales Could Grow by 6% in Q3
The largest business segment for Amazon is Online Stores. This segment is forecast to grow by 6% to $56.84 billion, accounting for ~40% of total sales. Amazon is the largest e-commerce company in the world, and e-commerce remains a key driver of top-line growth for the company.
Currently, online spending contributes to 15.4% of total retail sales in the U.S., and this number is much lower in other developing economies, providing Amazon with enough runway for expansion in the upcoming decade.
Amazon enjoys a competitive moat due to its enormous global footprint and wide network of fulfillment centers and warehouses, which allows it to keep delivery costs low and ensure the timely shipment of products.
Will Amazon Web Services Maintain Its Stellar Growth Rate?
Amazon is also the largest public cloud company in the world. In the June quarter, Amazon increased AWS sales by 12% to $22.1 billion, a significantly lower growth rate than in recent years due to cautious spending by enterprises.
AWS has a market share of 32%, and the public cloud market is forecast to touch $1.6 trillion by 2030, according to IndustryARC. If AWS can maintain its market share, its cloud sales should surpass $510 billion by the turn of this decade.
AWS is the primary driver of Amazon’s bottom line, with an operating margin of 24.7% in the last 12 months.
Amazon Ads — A Key Driver of Sales
Amazon’s Advertising segment is expected to be the company’s fastest-growing business. In fact, Amazon is the third-largest digital ad platform in the world after Alphabet’s (NASDAQ:GOOGL)(NASDAQ:GOOG) Google and Meta’s (NASDAQ:META) Facebook.
While Alphabet and Meta have been wrestling with tepid ad sales in the last 18 months, Amazon is quickly gaining market share as the platform provides advertisers with a customer base that has a much higher purchase intent.
According to a report from InsiderIntelligence, Amazon accounted for 10.3% of the digital ad market in the U.S. in 2020. Comparatively, Alphabet and Meta had shares of 28.9% and 25.2%, respectively. This year, Amazon has a 12.9% market share.
Looking forward, InsiderIntelligence expects Amazon’s ad revenue to touch $34 billion by 2024, accounting for 14.6% of the total market. The digital ad market is forecast to reach $315 billion by 2025. If Amazon can end the year with a 15% market share, its ad sales could surpass $47 billion in the next two years.
Amazon Focuses on Cost-Cutting
Amazon ramped up capital spending during COVID-19 to keep up with an increase in demand. However, as economies reopened and online spending reduced, Amazon’s free cash flows took a massive hit. For example, Amazon reported a free cash outflow of $11.6 billion in 2022 compared to an inflow of $31 billion in 2020.
As a result, Amazon focused on lowering its cost base to boost profit margins. It reduced capital expenditures by 10% year-over-year in the last four quarters. Moreover, Amazon also reduced its employee count on the back of corporate layoffs and restructuring.
Amazon’s cost savings efforts should allow the company to end 2023 with adjusted earnings of $2.16 per share, according to analysts, compared to a loss of $0.27 per share in 2022.
Is AMZN Stock a Buy, According to Analysts?
Out of the 42 analysts covering AMZN stock, 41 recommend a Buy, and one recommends a Hold. The average Amazon stock price target is $175.38, which is 38.6% above current prices.
The Final Takeaway
Amazon is a mega-cap, big-tech company that continues to fire on all cylinders. Despite its massive size, Amazon is growing sales and its profit margins at an enviable pace. The company reported an operating margin of just 2.4% in 2022. But in the last quarter, its operating margin more than doubled to 5.7%. Additionally, its diverse business segments and leadership position enable the firm to withstand major economic downturns and deliver outsized gains over time.
