Shares of Amazon (NASDAQ:AMZN) have fallen over 4% in the last six months, while fellow tech giants helped drive the S&P 500’s 10% climb. It appears that investors are worried about Amazon’s profit. But how long will Amazon stock stay stagnant as the e-commerce powerhouse spends to speed up its delivery?
Amazon in the third quarter posted its first year over year earnings decline since 2017. AMZN’s adjusted EPS figure slipped 26% from Q3 2018 and fell short of our Zacks estimates. The third quarter disappointment came after the firm missed bottom-line estimates in the second quarter and ended its streak of record quarterly profits.
Wall Street appears to have voiced its concern for Amazon’s profits pullback. But the company’s bottom-line fell, in part, because it decided to spend heavily to introduce one-day shipping. AMZN’s Q3 shipping costs soared 46% to $9.6 billion from a year earlier.
These efforts are expected to help Amazon in the long run as it fights back against Walmart (NYSE:WMT) , Target (NYSE:TGT) , Costco (NASDAQ:COST) , and others who have bolstered their businesses through an array of e-commerce, delivery, and pick-up offerings.
Jeff Bezos said last quarter that the transition of Prime shipping from two-day to one-day is vital. “It’s a big investment, and it’s the right long-term decision for customers,” Amazon’s CEO said in prepared Q3 remarks.
Investors are also concerned about Amazon’s slowing top-line growth. Amazon’s high-margin cloud computing business, which has helped drive its expansion for years, grew at its slowest pace in six quarters in Q3 FY19. AWS still climbed 35%, but this was down from Q3 FY18’s 46%.
Luckily, Amazon’s digital ad-heavy “other” division helped pick up some of the slack, with sales up 45%. In fact, Amazon is projected to grab the third-largest share of U.S. digital ad dollars in 2019, behind only Google (NASDAQ:GOOGL) and Facebook (NASDAQ:FB) . Plus, AMZN’s high-margin cloud business will likely continue to help it expand into new growth areas, from pharmaceuticals to logistics.
Amazon’s streaming TV business might also remain attractive in a crowded market alongside Netflix (NASDAQ:NFLX) and others given its commitment to spending on original content and a mixture of live sports, including some NFL and soccer.
We can see from the nearby chart that AMZN stock rests below its fall-2018 highs. Amazon stock closed regular trading Monday around 10% off its highs at around $1,828 per share.
And for those that take a more technical approach, AMZN just dipped under its 200-day moving average after bouncing through it in late December. The stock might find support soon at its 50-day moving average. But the technicals might not matter with Amazon set to report.
Meanwhile, Amazon is currently trading at 2.7X forward 12-month sales estimates. This marks a discount against its industry’s 4X average and its own three-year median of 2.8X and 3.7X high.
Amazon’s adjusted Q4 earnings are projected to slip 34%, based on our Zacks estimates. This would mark a larger downturn than last quarter. However, its adjusted full-year earnings are projected to pop 1.8%. Then, the e-commerce firm’s 2020 EPS figure is expected to surge 28% above our current-year estimate.
On the top line, Amazon’s fourth quarter sales are projected to jump 18.8%, with FY19’s revenues set to surge roughly 20% to reach $279.11 billion. The company’s 2020 sales are then expected to climb another $52 billion, or 18.5%, above our current-year estimate to come in at a whopping $330.95 billion.
These revenue figures would mark a slowdown compared to Amazon’s sales growth from 2018 through 2016, which came in at approximately 30%. Peeking further back, our 2019 and 2020 sales estimates would roughly match 2015-2013’s revenue expansion.
Amazon is set to report its Q4 financial results after the closing bell on Thursday, January 30. AMZN is currently a Zacks Rank #3 (Hold) that holds a “D” grade for Value and an “F” for Momentum in our Style Scores system.
Investors likely want to take a wait-and-see approach, given the current market conditions and the fact that Amazon has underperformed the market for months.
However, it does seem hard to imagine that Amazon stock will stay down for that much longer. And its upcoming earnings report could be a catalyst, which means investors need to pay close attention to guidance and how Wall Street reacts in the days following the release.
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