Amazon earnings on deck: Mag 7 giant shifts to old-school profit focus
Amazon is driving a host of new tech innovations, but investors are likely to focus on an old-school metric when it reports earnings later today.
Amazon (AMZN) - Get Free Report shares moved higher in early Thursday trading ahead of the tech, media and retail giant's fourth-quarter earnings, slated for after the closing bell,
Amazon might be the most important stock in the Magnificent 7 group of tech giants, given its market-challenging positions across web services, streaming media and advertising sales, all of which complement its dominant role as the world's largest online retailer.
Related: Apple lags Mag 7 rivals in key area analyst say could support earnings
The breadth of its business divisions, however, typically require significant amounts of capital to keep them humming, and Amazon has devoted an average of around $15.6 billion in capital spending for each quarter over the past two years.
That's starting to change, however, and big job cuts tied to an overhaul of its logistics division, as well as staff reductions in media, home device technologies and its Twitch videogame-streaming division are set to provide a better balance of spending and revenue into the coming year. Smith Collection/Gado/Getty Images
That likely means an old-school focus on expanding profit margins will be key for investors when Amazon posts its December-quarter earnings after the close. Analysts expect operating-profit margins for the full year widened by 4 percentage points from 2022 levels to 18%.
One area that has suffered from margin expansion, however, is Amazon's Prime Video division, thanks in part to heavy investments in media assets such as MGM studios, which Amazon bought for $8.5 billion in 2022, and the $11 billion rights deal for NFL Thursday Night Football.
Prime Video ad launch in focus
That's likely to be offset this year by Amazon's plans to insert "limited" ads within Prime Video's TV and movie offerings. U.S. customers have the option to pay an extra $2.99 (on top of the base Prime membership price of $14.99) for an ad-free version.
"Prime Video is an integral part of the overall Prime value proposition, as it’s often one of the top two reasons why customers sign up for Prime," said CFRA analyst Arun Sundaram, who notes delivery speed as the principal driver.
"We’re positive on the Prime Video ad strategy, particularly since Netflix (NFLX) - Get Free Report has proven that ad-supported streaming plans can be successful," he added.
Overall ad revenue is estimated to have risen by around 20% from fourth-quarter 2022 to $13.9 billion. That would take the 2023 total to around $46.1 billion.
Amazon's core online retail business is still likely to contribute the lion's share of revenue, hauling in more than $82.2 billion thanks in part to a record run of online spending over the final two months of the year, based on data from Adobe Analytics.
Heavy discounting and rising input and delivery costs, however, are likely to keep margins in that business compressed, although the introduction of "Buy Prime," which enables third-party merchants to use Amazon's logistics services, is expected to provide some support.
"The strategy is likely to work well with smaller [third-party] vendors who lack discounts with UPS and FedEx presently, but is less likely to gain share from larger [business-to-consumer] shippers who've already locked in discounts with their existing carriers," said D.A. Davidson analyst Gil Luria.
Amazon Web Services a key growth driver
Another key area in the release is likely to be the growth rates for profit and revenue at Amazon Web Services, the flagship division of the group's tech ambitions, and its ability to hold market-share gains against AI-fueled competition from Alphabet (GOOGL) - Get Free Report and Microsoft (MSFT) - Get Free Report.
AWS's fourth-quarter revenue rise is pegged at just over 13% from year-earlier levels to around $24.26 billion, although analysts will want to hear how the group is infusing AI technologies into cloud offerings.
Amazon launched a business-focused Chatbot, called Q, last year as part of its effort to keep pace with Microsoft's Copilot. It also plans to make a new series of AI chips that will complement those made by Nvidia (NVDA) - Get Free Report to boost the speed and processing power of its servers.
"AWS expectations seem reasonable heading into a year where [generative] AI cloud costs could help drive an early reacceleration," said Benchmark analyst Daniel Kurnos, who carries a buy rating with a $175 price target on Amazon stock.
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"The timing of the AWS reacceleration could be a modest concern, but we think consensus looks reasonable enough from 4Q23 to 4Q24 to prevent any major hurdles barring a surprise negative sea change," he added.
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Overall, Amazon is expected to post fourth-quarter profit of around $29.3 billion, or 80 cents a share, with revenue rising 11.4% to $166.2 billion.
Amazon itself forecast operating income of between $7 billion and $11 billion on revenue in the range of $160 billion to $167 billion when it published third-quarter earnings in late October.
"Between the e-commerce efficiencies, advertising growth, and generative AI opportunities, we believe Amazon has many levers to continue growing profits and [free cash flow] in 2024 and beyond," said Sundaram at CFRA.
"We also see upside to [Wall Street] estimates and believe AMZN’s valuation is compelling," he added.
Amazon shares were marked 1.19% higher in premarket trading to indicate an opening bell price of $157 each, a move that would extend the stock's three-month gain to around 18%.
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