What Happened

Amazon reported earnings on October 24, 2019 after the market close. Reporters focused heavily on Amazon's 26% decline in EPS, which missed estimates and spurred a pullback in the stock in after-hours trading. However, a good portion of this EPS drop was due to Amazon's substantial investment in infrastructure to slash shipping time to its coveted Amazon Prime customers from two days to one. Amazon's goal is to leverage that better service to fuel longterm sales growth.

More worrisome for investors may be signs of slowing growth for Amazon's highly profitable cloud business, known as Amazon Web Services. Revenue growth at AWS slowed from 46% this time last year to 35% in the latest quarter. While the growth of AWS is faster than Amazon's 24% corporate sales increase during that period, investors will be watching closely to see if this trend continues. Cloud services are becoming a key earnings driver at Amazon.

(Below is Investopedia's original earnings preview, published 10/24/19)

What To Look For

E-commerce giant Amazon.com Inc. (AMZN) reports earnings on October 24, 2019 for Q3 2019. While web commerce is the biggest part of Amazon's business, investors should focus on revenue from the company's fast-growing cloud computing business, Amazon Web Services (AWS). Amazon's cloud business, which has the No. 1 market share in the industry, is expected to post robust growth in Q3 even as analysts estimate overall corporate profit will fall by about 20%.

Amazon's stock has fallen slightly in the past year as the S&P 500 has grown by 7.7%. This is a departure from the past three and five year periods, when Amazon's stock grew faster than the S&P 500. One reason for this uncharacteristic under-performance may be increased regulatory scrutiny of the company, which reportedly is the focus of a Federal Trade Commission investigation.

Amazon and S&P 500 1-Year Returns
Source: TradingView.

Another reason for its weaker stock performance may be investors' concern about how long the company can maintain its rapid revenue growth, given its giant size, in the face of a slowing U.S. and global economic growth. Amazon fell at the end of last year after it missed revenue expectations in Q3 2018, as growth slowed substantially. Amazon then squeezed profits by spending over $800 million in Q2 of this year to speed up shipments to consumers. The goal: to increase sales. However, as a result of this spending, Amazon's stock suffered after it reported earnings per share (EPS) of $5.22 in the second quarter, below consensus expectations.

Amazon Key Metrics
  Q3 2019 (Estimate) Q3 2018 Q3 2017
Earnings Per Share (in dollars) 4.57 5.75 0.34
Revenue (in billions of dollars) 68.7 56.6  43.7 
AWS Revenue (in billions) N/A 4.6 3.2
Sources: YCharts, Amazon Investor Relations

Amazon Web Services offers companies and individuals use of its cloud services to run websites, databases, and programs. This is less costly for many companies than buying and operating their own servers. AWS's revenue is a key metric to watch during earnings releases because of the disproportionate role it plays in generating profits for Amazon. Its profit margins are so much higher than Amazon's e-commerce business that AWS generated only 13% of corporate revenue, but generated well over half of Amazon's operating income in Q2 2019. (Amazon does not report net income by segment). Amazon Web Services has been growing rapidly, by 44% from Q3 2017 to Q3 2018, compared to 30% corporate revenue growth over that period. As AWS gets bigger, it will increasingly offset slower growth in Amazon's e-commerce business. Between the speed of its growth, and its high margins, AWS is the segment to watch in Amazon's upcoming earnings.