Key Takeaways

  • Amazon's EPS was $10.30 vs. the $1.32 analysts expected.
  • Overall sales surpassed expectations.
  • Amazon Web Services grew, but by slightly less than analysts had expected.

What Happened

Amazon reported an extraordinary earnings beat, seemingly completely undiminished by the continuing antitrust investigation, roughly doubling its EPS year over year, when analysts had expected it to drop by 75%. This is after Amazon invested $4 billion in COVID-19 infection management last quarter around the time when multiple whistle-blowers were fired after speaking up about insufficient protection from the disease. As quarantine has forced people to stay inside, Amazon's e-commerce sales blasted off and smashed expectations. Its highly profitable Amazon Web Services segment grew significantly, but slightly missed analysts' expectations. Amazon's stock is up sharply in after-hours trading.

(Below is Investopedia's original earnings preview, published July 23, 2020.)

What to Look For

Amazon.com Inc. (AMZN) has proven to be one of the star performers during the COVID-19 crisis amid soaring online shopping and robust demand for cloud computing services. Amazon's stock has soared nearly 80% from its March low this year, dramatically outpacing the market. Amazon's superior performance has come despite missing earnings estimates in its most recent quarter, and as CEO Jeff Bezos spends billions of dollars to ramp up Amazon's supply chains and warehouse safety procedures amid the pandemic.

Investors will look closely at how these trends are affecting the company when Amazon reports earnings after the market close on July 30 for Q2 FY 2020. Analysts currently expect a very mixed quarter. They estimate earnings per share (EPS) will plunge for the third time in four quarters even as the company posts the healthiest revenue gains in seven quarters.

A key metric that Amazon investors will watch in the results is the fast-growing cloud computing segment, Amazon Web Services (AWS). The world's largest cloud services business, Amazon Web Services is a major contributor to the company's revenue growth, and also has the highest profit margins of any Amazon business by far. For Q2, analysts expect AWS to post strong sales, though that growth will be slower than recent quarters.

In addition to outperforming in recent months, Amazon's stock also has outpaced the market in in the past 12 months, posted a total return of 55.6% compared with 9.5% for the S&P 500.

One Year Total Return for S&P 500 and Amazon
Source: TradingView.

Amazon missed analysts' earnings estimates for Q1 FY 2020 as Amazon grappled with how to meet soaring consumer orders amid the pandemic. While the stock dropped the day after the April 30 earnings release, it then rebounded over the next three months. Amazon's EPS performance historically has been erratic as CEO Bezos has focused on long-term growth instead of quarterly profits. That's illustrated by EPS performance in Q2 periods during the past three fiscal years, with EPS falling by 77.6% in FY 2017, rising 1,165.7% in 2018, and essentially flat at 3.0% growth in FY 2019. Now, analysts estimate EPS will fall 74.6% YOY to $1.32 per share in Q2 FY 2020. One force causing that decline is that Bezos said the company plans to spend all of Amazon's estimated $4 billion in Q2 operating profit on continued expenses related to COVID-19.

By contrast, Amazon has reported strong quarterly YOY revenue growth every quarter for more than four years. Analysts expect that trend to continue, with YOY revenue growth of 27.8% for Q2 FY 2020. At this rate, Amazon's Q2 revenue would more than double between 2017 and 2020. Despite the pandemic, analysts estimate Amazon's revenue will rise 24.3% for all of FY 2020. While that's faster than FY 2019, it nonetheless would be the slowest pace in five years.

Amazon Key Metrics
  Q2 2020 (Estimate) Q2 2019 Q2 2018
Earnings Per Share (in dollars) 1.32 5.22 5.07
Revenue (in billions of dollars) 81.0 63.4 52.9
AWS Revenue (in billions) 11.0 8.4 6.1

Source: Visible Alpha

A major contributor to Amazon's long-term success is steady growth in its highly profitable Amazon Web Services segment. This portion of the company provides corporate and individual clients with cloud services used to run websites, databases, and a variety of programs. It is less costly for many companies than buying and operating independent servers. AWS revenue is a key metric for investors to watch because cloud profit margins are extremely high and contribute a disproportionate percentage of the Amazon's profit. By contrast, while most of Amazon's sales come from e-commerce, these sales have relatively low profit margins. Thus, any improvement to AWS revenue will provide an outsized boost to overall profits as compared with a similar improvement to e-commerce revenue.

AWS sales have grown at an impressive clip in the past several years, although the rate of growth appears to have slowed slightly in recent quarters. YOY quarterly AWS revenue grew by at least 45.0% each quarter in 2018 and by at least 34.0% each quarter in 2019. In Q1 FY 2020, this growth slowed slightly to 32.8%.

For Q2 FY 2020, analysts estimate cloud revenue will increase 31.1%, the lowest level in at least four years. Despite this slowdown, AWS is more important than ever in bolstering the company's top line, its revenue growth. And the rich margins of AWS are crucial to helping its bottom line as expenses soar at Amazon's giant, low-margin e-commerce business.