The cloud computing arm of the company, Amazon Web Services, is expected to bring in 33 percent more money in the third quarter than it did in the same time last year.
The financial report for Amazon’s June quarter looks like it will be one of the worst in the company’s 25-year history. The question is what will happen next.
Amazon (ticker: AMZN) will announce its results for the second quarter after the market closes on Thursday. The company expects sales for the quarter to be between $116 billion and $121 billion, which is an increase of between 3% and 7%. Anywhere in that range would be the slowest quarter of growth for the company in the last 20 years. Amazon thinks that its operating income will be anywhere from a $1 billion loss to a $3 billion gain. Most people on Wall Street expect $119.3 billion in sales, $1.8 billion in operating income, and 14 cents per share in profits.
In the last few days, two major players have hit the retail sector with bad news.
Walmart (WMT) cut its guidance for the second quarter and the whole year, saying that food prices are making people less likely to spend money on non-essential items.
Shopify (SHOP) said it is letting go of 10% of its employees because online shopping is slowing down, which is hurting sales. Together, these two things make Wall Street nervous about both online and offline stores. Even before those two reports, Wall Street had predicted that Amazon’s online store sales would drop by about 2%, following a 3% drop in the March quarter.
Of course, that’s not the whole story on Amazon. Amazon Web Services, the company’s market-leading cloud computing arm, will be a big part of how Wall Street thinks about the quarter. Street estimates say that it will make $19.7 billion, which is up 33% from last year. The company’s advertising business will also be an important part of the quarter. It is expected to make $8.7 billion in revenue, which is up 21 percent from a year ago.
The guidance for the September quarter will be another important factor. Estimates from Wall Street say that sales will be $126.7 billion, up 14% from last year, and operating income will be $4.4 billion.
A few other things should be kept in mind.
Amazon’s stake in the company that makes electric trucks, Rivian Automotive RIVN, cost it $3.8 billion in the first quarter. Rivian shares dropped almost 50 percent in the June quarter, so the company will have to take another non-cash charge this time.
Also, Amazon had thought that currency would hurt them by 2 percentage points in the quarter, but the dollar has gotten stronger since the company made that prediction, which means the real effect will be bigger.
Amazon had also said that the results for the June quarter would include about $4 billion in higher costs due to inflation, mostly for fuel and transportation. Not only that, but when Amazon reported its results for the March quarter, it said that it should see better revenue growth from year to year as it gets easier to compare.
In a note about the upcoming quarter that he wrote on Tuesday, BofA Global Research analyst Justin Post said that this week’s Walmart earnings pre-announcement could be bad news for Amazon’s gross margin. He thinks the company will make progress on supply-chain problems and getting rid of excess logistics capacity. However, he thinks margins will be hurt by people buying less expensive items and the company possibly making moves to get rid of some Amazon-branded goods.
Barron’s recently said that Amazon shares could double or triple from where they are now if the company can get more value out of Amazon Web Services. For now, Wall Street is more interested in the problems the company is having in the retail sector. If the market starts to think that the June quarter was the low point for the company’s e-commerce business, it could change the way people feel about the shares.
So far this year, Amazon shares are down by about 31%.