The earnings season for tech giants is in full swing, but the current volatility in the sector's stocks stands in sharp contrast to the initial enthusiasm that propelled Tesla's stock and investors' expectations for the remaining members of the "Magnificent Seven." Big Tech's strong run, bolstered by a solid report from Alphabet (Google's parent company), was shaken by the mixed outcomes of Meta's and Microsoft's results yesterday, which did not reflect similarly stable growth in the cloud or AI sectors.
Investors’ attention today will be focused on Amazon, which, alongside Apple, will release its Q3 2024 results after the trading session. For investors, the most critical elements will be the performance of the cloud segment (Amazon Web Services; AWS), the retail sales margin, and Project Kuiper (which aims to develop satellite internet and incurred significant investment costs for the company in Q2 2024).
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Q3 2024 earnings outlook
Analysts expect revenue to rise to $157.29 billion, which represents an approximate 10% year-over-year increase (Q3 2023: $143.08 billion), thereby maintaining the growth rate from the previous quarter. Earnings per share (EPS) are forecasted at $1.16, marking a 23% jump compared to the same period in 2023 (Q3 2023: $0.94). Amazon consistently exceeds EPS expectations, so investors widely anticipate a solid report for the last quarter.
Source: Bloomberg Finance L.P.
Amazon Web Services in the limelight
The performance of the cloud segment will be crucial for the future dynamics of Amazon's stock. Investor sentiment is generally positive, mainly due to the excellent results from Alphabet's cloud products. However, Microsoft Azure Cloud's weaker-than-expected growth further emphasizes the importance of AWS in today's report. Currently, the market estimates a revenue increase from Amazon's cloud services at $27.5 billion (+19.05% YoY), which is a slight acceleration compared to the 19% growth in the previous quarter.
Expectations for AWS are particularly high due to its dominant position in the cloud solutions market. Amazon leads the sector with a stable 32% market share (with Microsoft being second with 23% in Q2) and annual revenue of $105 billion. The strong demand for AWS is primarily driven by the modernization and development of database infrastructure in companies and the technological requirements needed for advancing generative AI models. While advertising its solution, Amazon also emphasizes AWS’ broader functionality, integration of AI features and its industry leading security standards.
Sales and margins
The sales performance will also be significant for Amazon, as it fell short of expectations in the previous quarter. In response to the last results, Amazon CEO Andy Jassy emphasized that the company would focus on low-cost, low-margin products to rebuild sales in the segment. However, uncertainties arise from the upcoming holiday season, which will further pressure the company to implement competitive discounts to attract consumer attention during this crucial retail period. Analysts forecast an increase in online sales to $59.6 billion, while for advertising revenue, the market expects an 18.9% growth compared to the same period in 2023.
The results for Q2 2024 (yellow) and forecasts for the following quarters for each sector. Source: Bloomberg Finance L.P.
AMZN.US (D1)
Amazon's stock experienced a significant decline upon the release of its last financial report, primarily due to weaker sales. Since the mini-crash on August 5, there has been a steady upward trend followed by a consolidation phase. Pressure ahead of the earnings report has pushed Amazon's stock down approximately 3.8% in the hours leading up to the company's report, resulting in a crossing below the 30-period EMA. A solid AWS performance, along with improved sales, could certainly help the stock return to an upward trend. Conversely, ambiguous results are likely to contribute to similar declines as seen today in stocks like Microsoft and Meta. Markets are currently expecting a bullish 6.7% implied 1D change for Amazon’s stock.
Source: xStation5
