How Investors Can Capitalize on Amazon’s Q4 Earnings This Thursday

The e-commerce and hyperscaler behemoth Amazon (AMZN) will report its Q4 earnings results this coming Thursday, February 6th — and this quarter, the stakes have never been higher.

Even though Amazon’s Q4 looks quite promising, and I’m bullish on the stock, the company’s bar is inching ever higher with every earnings call. Once the more conservative pre-Q3 expectations are factored in, Amazon has shot up about 20% since its solid Q3 results in late October last year.

However, although a beat across the board may be required for a bullish post-Q4 reaction, I believe much of the market’s response will depend on the main topics of conversation on earnings day: Amazon Web Services (AWS) growth and margins, CapEx spending, and double-digit growth in its other businesses segments.

AWS Powering Growth and Margins

Much of the bullish thesis on Amazon is intrinsically connected to its cloud business and AI — both in terms of current profitability and future potential. Since CEO Andy Jassy took the helm and shifted Amazon’s focus to higher-margin segments, such as AWS, it’s no surprise that it now accounts for ~74% of AMZN’s total profits. Thus, the market has seen Amazon as primarily a hyperscaler in recent years, with its e-commerce business taking a back seat.

Currently, AWS is the market leader in cloud computing, holding 31% of the global market share, with Microsoft’s Azure close behind at 20%. Even while leading, AWS continues to grow robustly. In the last five quarters, sales have accelerated from 12% to 19%, making it the fastest-growing segment in terms of revenue.

Of course, growth rates are becoming increasingly difficult to sustain at a high level, and the big question is how long Amazon can keep growth in the high teens. To understand how the market will react to AMZN’s earnings call this week, paying close attention to any hints shedding light on this issue is essential.

In Q3, AWS grew 19%, the same percentage as in Q2. As the management team sees a significant, unmet demand for AI, Amazon can still grow AWS sales. In fact, the company has provided guidance of $188.6 billion in total net sales for Q4, representing growth of 7% to 11% compared to Q3.

Nevertheless, although focusing on sales growth is one of the main points for the bullish thesis on Amazon, that alone isn’t enough. In addition to growing revenue, Amazon must maintain strong operating margins. Over the last three quarters, margins have shown some volatility. Amazon’s management team acknowledged that margins may fluctuate due to the ongoing high level of expenditures on AI infrastructure and staffing changes, but essentially, I don’t believe margins will deviate much from these levels.

Amazon’s AI CapEx Boost

Amazon will still be required to maintain extensive infrastructure to absorb all of its customers’ demand for AWS. As a result, in the last twelve months, CapEx increased by 17.5%, reaching $64.9 billion during the same period, with Q3 rising 88% compared to the same quarter last year. Amazon’s CFO, Brian Olsavsky, announced plans to spend approximately $75 billion in CapEx in 2024.

It’s important to note that Amazon has historically been more concerned with financing growth than increasing profitability, even before the AI boom. Interestingly, in such cases, most companies that continue to spend at these high rates eventually suffer from margin degradation or compression. However, AMZN is demonstrating how to generate revenue growth at a massive scale while simultaneously boosting margins. This unique combination makes AMZN very investable, propelling the company towards being the first to monetize AI at scale.

Therefore, if Amazon increases its CapEx guidance for AI or indicates higher spending in FY2025, it would be a clear sign that demand remains strong, which I believe would be bullish for Amazon’s stock in 2025 and beyond.

AMZN’s Double-Digit Growth

Of course, Amazon is not all about cloud computing. Around 82% of Amazon’s net sales come from the North American and International segments, although only 38% of operating income came from these segments in Q3.

In the latest quarter, North American sales grew by 9% year-over-year, while International sales grew by 12% in the same period. However, when we break it down between businesses, ranging from third-party sellers, advertising, and subscriptions, all of these in Q3 achieved double-digit annual growth, except online and physical stores, which grew by 8% and 5%, respectively.

Maintaining double-digit growth in most of these businesses will likely result in a buoyant market reaction, especially considering the consistently positive improvement in profit margins in North American and International segments—two areas that have historically struggled to deliver sustained positive operating margins.

Is Amazon a Buy, Hold, or Sell?

On Wall Street, the analyst consensus is bullish for AMZN, with 40 out of 41 analysts rating the stock as a Strong Buy and one as a Hold. Notably, not a single analyst rates AMZN as a Sell. The average price target is $261.21 per share, suggesting an ~8% upside from its current price.

See more AMZN analyst ratings

AMZN Set to Prosper as Successful Market Strategy Pays Off

Amazon faces a high-stakes quarter where it must prove it can sustain strong growth in AWS while maintaining margins that justify ongoing AI infrastructure spending, especially as demand continues to outpace supply.

While some volatility in these numbers may initially unsettle investors, I’m reiterating my Buy rating on Amazon stock ahead of its earnings announcement this Thursday. A positive market reaction will likely hinge on AWS growth, margins, and capital expenditures, and, importantly, although a strong beat across the board may be necessary for a bullish post-earnings move, investor sentiment will ultimately depend on management’s commentary and performance in these critical areas.

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