Is Amazon’s Cloud Looking Alive?

E-commerce giant Amazon.com AMZN is expected to end 2022 with yet another disappointing result.

The main reasons behind the current struggle are slowing growth of Amazon Web Services and declining e-commerce sales. Central to the stock’s outlook is the company’s strategy to improve operational efficiency in light of rising costs and challenging economic conditions.

When Amazon reports earnings after the close of trading on Feb. 2, analysts expect earnings of $145.7 billion, or $0.17 per share, according to FactSet data. The company’s fourth-quarter expectations have been tempered by third-quarter results, led by a slowdown in AWS, and significantly weaker fourth-quarter guidance.

Morningstar Senior Equity Analyst Dan Romanoff sees Amazon’s near-term outlook clouded, largely due to economic headwinds such as inflation, a stronger dollar and slower growth at AWS. “We can look at these issues, but we think they are likely to continue until 2023, and it also reduces confidence in the medium term,” said Romanov.

Amazon Revenue Forecasts for Q4 2022

• Expected revenue of $145.7 billion versus $140 billion to $148 billion.

• Estimated earnings per share of $0.17.

• Signs of further slowdown in AWS growth and declining e-commerce sales.

Wall Street is gearing up for a weak quarter, partly because Amazon’s earnings guidance was weak when it reported third-quarter earnings.

At the time, Amazon management set its Q4 sales outlook at $140 billion to $148 billion, compared to the previous average FactSet estimate of $155.1 billion. The lower guidance is a result of slower growth in AWS as well as a weaker e-commerce revenue outlook.

These disappointing third-quarter results and outlook prompted Romanoff to lower its fair value estimate for Amazon stock to $150 from $192 in October. Heading into its fourth quarter earnings report, the stock is undervalued by about 32% based on his fair value estimate.

Every cloud…?

AWS drives most of Amazon’s revenue growth, and Romanoff said it remains an important business for investors to watch. During the third quarter, AWS grew 27%, well below his 37% compound quarterly growth rate for 2021.

Given the tougher economic environment, customers are becoming more cautious about their spending. With a strategy similar to that of competitor Microsoft MSFT, pressure is also being placed on the Azure cloud business, and Amazon is helping customers manage cloud computing costs and maintain business relationships.

Weak Demand Expected for Amazon.com

Although much of Amazon’s overall revenue growth comes from its AWS cloud business, retail sales through its website still make up the bulk of its revenue. About 84% of Amazon’s revenue in the third quarter came from its North America and International segments (not including AWS sales).

“E-commerce demand hasn’t picked up as much as many had hoped, and I don’t think it’s going to be much better this quarter,” Romanov said.

Expenses have also risen significantly in two segments, reducing the profitability of the company’s retail sales. In fact, in his first three quarters of 2022, Amazon posted an operating loss of about $8.13 billion across its North America and International segments combined. Most of the loss was in the International segment, but the North America segment still lost about $2.61 billion. His operating income for the first three quarters of 2021 was $8.18 billion, with both segments reporting profits.

Amazon is also grappling with staffing challenges after massive hiring aimed at meeting surges in demand during the coronavirus pandemic, Romanoff said. Higher expenses have weighed on operating margins, which declined to 1.99% in the third quarter from 4.38% in the same period last year.

The company recently announced layoffs of as many as 18,000 employees, and employees recently went on strike for the first time in the UK to protest working conditions.

“Details on the recent layoffs, where those positions are, how efficient they are operating this quarter, what they’re going to get in the next few quarters, what the near-term financial impact will be, and if that’s in the guidance. How it affects you will be important, ”Romanov says.