What Happened

Amazon absolutely shattered expectations with its Q4 2019 earnings report. Analysts had expected a drop from last year's Q4 EPS of $6.18 to a little over $4. However, Amazon instead delivered an EPS of $6.47. Earnings beats are common, but ones of this size are harder to find. Amazon's revenue beat expectations as well, although by a much smaller amount. One driver of this earnings boost was the fact that Amazon's high-margin AWS business posted higher-than-expected revenue. Amazon's stock rose more than 12% in after-hours trading.

(Investopedia's original earnings preview is below, initially published on 1/24/2020)

What to Look for

Despite a stunning five-fold rise in Amazon.com Inc. (AMZN) stock over the past five years, the outlook for the e-commerce giant is mixed as it prepares to report earnings on January 30, 2020 for Q4 2019. While e-commerce is the biggest part of Amazon's business, investors will focus on revenue from the company's fast-growing cloud computing business, Amazon Web Services (AWS), which is expected to post robust growth in Q4. But even with these gains, analysts estimate that Amazon's corporate diluted earnings per share (EPS) will fall by almost a third year-over-year (YOY). Amazon has badly lagged behind the S&P 500 in the last year after missing earnings estimates in Q2 and Q3 of 2019. 

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

Last quarter, Amazon missed estimates as EPS plunged 26.4% YOY. When the company reports for Q4, analysts estimate EPS will post an even steeper 32.0% decline YOY. If so, these two recent quarters will be outliers over the past two years, which included multiple quarters of more than 1,000% YOY quarterly EPS growth. Amazon's sales growth has been steadier over the past three years, when it has posted YOY quarterly revenue growth ranging from 17.0% to 42.9%. Consensus estimates for Q4 place YOY growth at 19.0%, toward the low end of that range, but still representing solid growth.

Amazon Key Metrics
  Q4 2019 (Estimate) Q4 2018 Q4 2017
Earnings Per Share (in dollars) 4.11 6.04 3.74
Revenue (in billions of dollars) 86.1 72.4 60.5
AWS Revenue (in billions) 9.9 7.4 5.1

Source: Visible Alpha

Key to Amazon's longterm success is strong growth in its hugely profitable Amazon Web Services segment. AWS offers companies and individuals cloud services that play a key role in running 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 12.9% of corporate revenue, but generated the vast majority of Amazon's operating income in Q3 2019. Amazon Web Services revenue has been growing rapidly, rising 44.6% YOY in Q4 2017 and 45.3% in Q4 2018. Corporate revenue has grown at a slower pace of 38.2% and 19.7% for those two periods, respectively.

Because AWS has tended to offset slower growth in Amazon's traditional e-commerce business, it is crucial for the company that AWS keep up its pace of growth in this highly profitable segment. Consensus predictions of 32.6% growth YOY for Q4, while strong, nonetheless could signal a slowdown in the pace that AWS is growing.