Amazon Q3 FY2021 Earnings Report Preview: What to Look For

Amazon.com Inc. (AMZN) has posted rapid earnings and revenue growth over the past year as the COVID-19 pandemic accelerated both the shift to online shopping and corporate demand for cloud computing services. Confident that the online shopping boom will continue, the company is expanding its workforce. In mid-September, Amazon announced plans to hire 125,000 employees to fill jobs in fulfillment and transportation throughout the U.S. Earlier that month, the company announced plans to hire 40,000 corporate and technology employees.

Investors will be watching to see if Amazon can maintain its recent strong financial performance when the company reports earnings on Oct. 28, 2021 for Q3 FY 2021. The news may not be good. Analysts expect earnings per share (EPS) to decline as revenue grows at the slowest pace out of any quarter in at least the past four and a half years.

Investors will also be focusing on revenue generated by Amazon Web Services (AWS), the company's high-margin cloud computing business. AWS still comprises a relatively small share of the company's overall revenue, but it generates the majority of Amazon's operating income. Analysts are expecting AWS revenue to rise, but at a slower pace than in the previous quarter.

Shares of Amazon have underperformed the broader market over the past year. The stock began the past year keeping pace with the market, but started to underperform in the first half of November 2020. Its performance gap especially began to widen around mid-February 2021. After beginning to close the gap between mid-June and late July, the stock has retreated and is lagging the market by nearly 30 percentage points. Amazon's shares have provided a total return of 5.3% over the past year, well below the S&P 500's total return of 34.5%.

Amazon Earnings History

Amazon reported Q2 FY 2021 earnings that beat analysts' estimates. EPS was up 46.8% compared to the year-ago quarter, the slowest pace of growth since the second quarter of FY 2020. Revenue missed consensus estimates, but was up 27.2% year over year (YOY). It was the slowest pace of revenue growth since Q1 FY 2020. The company said that it experienced greater numbers of businesses bringing forward plans to move operations to the cloud, which was reflected in the acceleration of AWS revenue.

In Q1 FY 2021, Amazon beat analyst estimates for both earnings and revenue. EPS rose 215.2% compared to the year-ago quarter, its fastest pace since the third quarter of FY 2018. Revenue grew 43.8%, its fastest pace of growth out of any quarter in at least the past four years. Amazon noted that streaming hours on Prime Video were up more than 70% YOY.

Analysts expect mixed results in Amazon's Q3 FY 2021. EPS is expected to sink 24.7% YOY, which would mark the first decline since the first quarter of FY 2020. Revenue is forecast to rise 16.3% YOY. Although revenue is expected to grow, it would mark the slowest pace of growth in at least the past 19 quarters. For full-year FY 2021, analysts expect EPS and revenue to rise 26.1% and 23.2%, respectively. Both would be dramatically slower than the rates of growth posted in FY 2020.

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The Key Metric

As mentioned above, investors will also focus on revenue generated by AWS, Amazon's cloud-computing platform. AWS offers developers a range of on-demand technology services, such as compute, storage, database, analytics, machine learning, and other services. These services are primarily used by start-ups, enterprises, government agencies, and academic institutions. The company's AWS business generates much higher margins than its e-commerce business. In FY 2020, Amazon's global retail sales- and subscription-based business segments generated about 88% of the company's total revenue while AWS accounted for a mere 12%. However, AWS accounted for 59% of total operating income for the year, making it Amazon's main profit generator.

Growth in AWS revenue has consistently slowed over the past five years, despite a brief acceleration in FY 2018. In FY 2015, annual AWS revenue grew 69.7%. Last year, revenue for Amazon's cloud segment grew at a healthy, but slower, 29.5% pace. However, growth accelerated through the first half of FY 2021. AWS revenue grew 32.1% YOY in the first quarter of the year before accelerating to a pace of 37.0% YOY in Q2. Analysts expect AWS revenue growth to slow to 33.3% YOY in Q3 FY 2021, but that pace would be faster than the growth rates posted in each quarter during the previous fiscal year. For full-year FY 2021, analysts expect AWS revenue to rise 33.2%, accelerating from the previous year's pace of growth.