Amazon Profit Slide, Outlook to Test Stock's 20% January Gain

E-commerce and cloud computing giant Amazon.com (AMZN) has braced investors for a steep profit drop, to be announced after the market close Thursday.

Fourth-quarter net earnings of 17 cents per share based on the average estimate of analysts tracked by Visible Alpha would represent a decline of 88% year-over-year. Analysts expect revenue growth to slow again, to 6% from a year earlier, amid a slowdown in corporate spending on technology.

The Street consensus is consistent with Amazon's forecast in October, when it projected fourth-quarter operating income between $0 and $4 billion, vs. $3.5 billion a year earlier, and net sales of $140 billion to $148 billion, representing growth of 2% to 8%.

When it reported third-quarter operating income down by roughly half year-over-year, Amazon cited increased shipping, fulfillment, and transportation costs amid investments in its fulfillment capacity. In the 12 months through September, free cash flow swung to a deficit of $19.7 billion, versus a gain of $2.6 billion during the preceding year.

Amazon has responded by announcing layoffs of 18,000 employees, after adding more than 300,000 to its payroll in 2021.

Amazon's share price rebounded nearly 20% in January, edging Meta Platforms (META) and Netflix (NFLX) for the biggest monthly gain by a tech mega cap, though the stock remains down 31% over the past year. That's worse than the 17% annual decline in the S&P 500 Technology Sector Index (see chart below.)

The stock remains a crowd favorite with 42 buy ratings, 8 overweight calls, 3 holds, and a single sell recommendation among analysts who follow it. In the last two weeks, five analysts have reiterated their bullish calls on Amazon, though four of the five simultaneously lowered their share price targets.

Amazon's focus on e-commerce and cloud computing means it's targeting the largest total addressable markets with the lowest market penetration rate, Barclays analysts wrote Monday in reiterating an overweight rating on the stock, while lowering the price target to $130 from $140.

"A weaker outlook at [Amazon Web Services] puts even more pressure on cost cuts at the retail segment to drive the margin story," UBS analysts wrote last week in lowering their price target to $118 from $121, while reiterating a buy recommendation.

Credit Suisse was the lone exception, raising its price target for Amazon to $171 from $142 on Monday. "We maintain our outperform rating, with the thesis based on the following: 1) e-commerce segment operating margin expansion as it grows into its larger infrastructure, 2) optionality for faster-than-expected FCF growth vis-à-vis its advertising segment, and 3) upward bias to AWS revenue forecasts and likely more moderate deceleration path as suggested by ongoing capital intensity in the business," Credit Suisse said.

"We think commentary on 1Q AWS trends will be the biggest risk following MSFT's Azure guide, but MSFT's stock reaction to 1Q outlook has calmed concerns, and AWS has an easier 1Q comp," wrote Bank of America analysts in a reference to Microsoft (MSFT), which competes against Amazon in cloud computing.

AMZN Share Price vs. S&P 500 IT Sector Index, Past Year

Amazon Key Stats

_{Source: Visible Alpha}

The Key Statistic

Amazon Web Services (AWS), Amazon's cloud computing segment, has been Amazon's fastest-growing business with the highest profit margins in recent years. It is one of three company segments alongside North America and International.

AWS consists of "global sales of compute, storage, database, and other services for start-ups, enterprises, government agencies, and academic institutions," according to Amazon. AWS sales were up 27% year-over-year in the third quarter. AWS is expected to post annual revenue gains of 22% in the fourth quarter and 21% in the first quarter of 2023.