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Oct. 24, 2019, 3:32 p.m. EDT

Amazon earnings preview: One-day shipping and AWS slowdown could squeeze results

Amazon shares have fallen more than 9% over the past three months

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By Tonya Garcia, MarketWatch


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Amazon’s investment in one-day shipping has been $800 million and counting.

Amazon.com Inc. is scheduled to report third-quarter earnings after the closing bell on Thursday, and Bank of America Merrill Lynch says one-day shipping and a slowdown in the cloud services business could weigh on profit.

Analysts led by Justin Post say third-quarter Amazon Web Services growth decelerated, and costs to ramp up one-day shipping could increase.

“Increasing regulatory scrutiny, as well as AWS growth and margin concerns, have limited stock appreciation in 2019,” analysts said.

Amazon /zigman2/quotes/210331248/composite AMZN +0.01%   stock is up 18.6% for the year to date, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.06%   has gained nearly 20%.

See: Netflix to sell another $2 billion of junk bonds as it braces for onslaught of competition

“We think the Street is constructive on the free one-day shipping benefit, but concerned on added investment to facilitate shipping and on the potential competitive impact on AWS growth,” analysts said. “Over time, we think Amazon should be able to better optimize shipping costs as more items are eligible for one-day delivery, a view that could help offset near-term concerns on one-day ramp up costs.”

Amazon committed $800 million in the second quarter to cut Prime delivery from two days to one and the company said during its earnings call that it’ll “see more cost in Q3.”

Bank of America rates Amazon shares buy with a price objective of $2,250, down from $2,350.

“We continue to have a positive view on potential for retail unit and revenue acceleration (easing comps over next three quarters plus benefit from Prime One Day), and improving setup for AWS growth in 2020,” analysts said.

Stifel analysts led by Scott Devitt think that the top line in North America will be bolstered by one-day shipping, but they’re keeping an eye out for lower operating income, due to the investment spending. Stifel forecasts operating income of $2.40 billion versus FactSet guidance for $2.94 billion, down from $3.72 billion last year.

“We support the company’s investment in faster shipping in an effort to widen the convenience advantage over e-commerce and traditional retail peers,” Stifel wrote.

“We would be buyers on any weakness stemming from potentially lower margin as historically the company has emerged from past investment cycles in a stronger competitive position and generated stronger-than-expected operating income dollars.”

Stifel rates Amazon stock buy with a $2,300 price target.

Amazon has an average buy rating, according to 48 analysts polled by FactSet. The average price target is $2,289.92.

Watch: Here are 3 tips for picking retail stocks

/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 1,752.79
+0.26 +0.01%
Volume: 2.27M
Nov. 19, 2019 4:00p
P/E Ratio
77.60
Dividend Yield
N/A
Market Cap
$868.90 billion
Rev. per Employee
$359,671
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/zigman2/quotes/210599714/realtime
US : S&P US
3,120.18
-1.85 -0.06%
Volume: 1.92B
Nov. 19, 2019 5:10p
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