Amazon earnings: what to watch
E-commerce giant Amazon (NASDAQ: AMZN) estimates that sales growth will slow in its fiscal third quarter. This is one of the many measures investors will be paying attention to when the company releases its results on October 27.
In this segment of “Beat & Raise”, recorded on October 4, Fool.com contributors Brian Withers and Parkev Tatevosian discuss what else to look for in Amazon’s fourth quarter results.
Parkev Tatevosian: Amazon, as most of our viewers know, has seen a surge in business during the pandemic. The third quarter predicts a 16% increase in revenue from last year, which is impressive considering the large increase it experienced last year. Earnings per share, however, is expected to drop 27% to $ 8.95, and I’ll explain why that’s the case. A few things to watch out for with Amazon are the still important guide to the fourth quarter holiday season. This will be especially important this time around, as this advice will not only incorporate customer demand expectations for the season, but it will also incorporate Amazon management’s best guess on how they think they can meet that demand. . Logistical constraints and all of that will be built into this fourth quarter forecast, so it will be important to watch. Next, you’re going to want to look at its two most profitable segments.
AWS, which is Amazon Web Services, the Cloud segment, and ad sales growth, which has accelerated at a rapid pace over the past four quarters. It started at 40% growth, then went to 50%, then to 60, then in the last quarter it increased 89% from the same quarter last year, so ad sales are increasing for Amazon. Interestingly, these two segments, even though they only account for around 10-15% of the company’s overall revenue, generate almost 55% of the company’s operating revenue. So they carry a lot of weight. It will be important to monitor these trends which continue to grow.
Finally, there’s execution, logistics bottlenecks, rising costs, and everything that is going on for Amazon. Amazon has done a pretty amazing job on hiring. Over the past year, they added around 450,000 employees, so they now have over 1.3 million employees on their network, which is impressive considering the battle for employees that has unfolded. Last year. Now management has pointed out that they have been successful in recruiting employees, but it was not without a cost, so they paid for that privilege to be, and they still don’t have enough staff, and they are still paying . They pay higher wages, they pay hiring bonuses, they pay tuition fees. I’m sure some of our viewers may have noticed that Amazon announced that they pay tuition, so they have a mix of compensation benefits that they offer potential employees to attract them. It worked somewhat, but it took a toll on earnings, and that’s part of why you see earnings per share go down 27%, even though revenue goes up 16%.
Brian Withers: That’s actually a good point, Parkev. The number you’ve thrown at the employees they’ve added this year is just mind blowing. I don’t know how many companies in America have 450,000 employees, and that’s exactly what Amazon added this year. [laughs] It’s incredible. Amazon did this several years ago, they’ve always done it on the warehouse side, but increasingly they’ve taken over the fulfillment of delivery from the fulfillment center to your doorstep, and now they mostly do it themselves. They have their own planes, they have their own trucks, 18-wheeled road vehicles and trucks going around your neighborhood, and delivery people who drop that at your doorstep. When the volume increases for Amazon, only they will be hooked, as they do most of these tasks on their own now.
Parkev Tatevosian: Management has not hesitated or hesitated to invest in its network and improve customer service. Like they said, they’re willing to invest in improving the customer experience, but it does impact short-term profits.
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