Amazon Web Services can be expected to put up solid growth numbers for Q4'22, but Amazon's consolidated topline growth is likely to show a continual deceleration. The most interesting part will be the revenue outlook for Q1'23.
Amazon, the global e-commerce and web services company, will report Q4 FY22 earnings on Thursday, February 2 after the market closes. February 2 is a big day for tech earnings with both Apple and Alphabet set to report earnings after the close.
This last year has been a challenging one for Amazon stock. Over the trailing twelve months Amazon stock is down -33%, underperforming the broad market, which is down -10% over the same period.
With a slowdown in online spending, and inflation raising its transportation and fulfillment costs, Amazon is dealing with some painful headwinds in the short-term.
Yet, long-term prospects are still promising driven by the continued adoption of Amazon Prime internationally, and the rapid expansion of Amazon Web Services.
Amazon Web Services likely to be a bright spot again, but topline growth set for further moderation in FY 2023
Amazon guided for 2-8% topline growth for the fourth quarter andgiven the persistent challenge of high inflation - which likely further weakened consumer spending throughout the fourth quarter - Amazon may report topline growth in the low- to middle-single-digit range of this guidance on February 2, 2023.
Despite moderating topline growth, however, Amazon Web Services is likely to remain a bright spot for the struggling e-Commerce company. Amazon Web Services may report Q4'22 revenue growth of 26-30% due to growing product adoption by large corporate accounts, which would put AWS revenues into a range of $22.4B to $23.1B. Besides robust topline growth, AWS may also report solid operating income for the fourth quarter. Since the segment was the only business that generated positive operating income in the third quarter, AWS will likely once again contribute all of Amazon's operating profits in Q4'22. Amazon's operating income projection for Q4'22 ranges from $0 to $4.0B.
Amazon was unable to report positive operating income in both the North American and the international e-Commerce segment in the first three quarters of FY 2022 as revenue growth slowed after the COVID-19 pandemic. Unless Amazon gets a grip on its e-Commerce performance in FY 2023 - which would likely require steep cost cuts and further lay-offs that go beyond the 18,000 headcount reductions already announced - e-Commerce operations are likely to continue to produce operating losses this year.
The combined operating loss from Amazon's e-Commerce operations in the first nine months of FY 2022 was $8.1B of which 68% came from the international e-Commerce segment. Amazon's total operating income in the first nine months of FY 2022 was $9.5B… all of which was contributed by Amazon Web Services, which posted total operating income of $17.6B.
Revenue challenges are real, and they are the top reason for the downside revaluation of Amazon's shares, despite the presence of the fast-growing AWS business.
Revenue estimate trend remains negative
In the last couple of weeks, revenue estimates for Amazon have continued to trend down, a sign that analysts are getting increasingly bearish about Amazon's topline potential in a slowing economy plagued by high interest rates and inflation. In the last 90 days, Amazon's FY 2022 EPS has seen 30 downward revisions compared to just 7 EPS upward revisions. Amazon may under-perform EPS expectations for the fourth quarter due to headwinds to e-Commerce growth (inflation, slowing economic growth), a strong USD, and the persistence of inflation which is weighing on consumer spending.
Moment of truth: Amazon's growth outlook for Q1'23
The most interesting part of Amazon's upcoming earnings sheet will be the revenue outlook for Q1'23. The e-Commerce company reported revenue growth of 15% to $127.1B in Q3'22, but the guidance for Q4'22 was widely seen as a major disappointment: Amazon has guided for $140.0B to $148.0B in Q4'22 revenues, implying as little as 2% year-over-year growth.
Amazon will not see, or will see, a fundamental improvement in its e-Commerce operations as long as consumers remains financially under pressure from higher consumer prices. For this reason, the moderation of topline growth, despite a positive AWS impact, will continue in FY 2023. For Q1'23, Amazon may see low-single-digit growth in its revenues and 6-7% growth for the full fiscal year.
Earnings Estimates
Zacks estimates call for Amazons Q4 sales to increase 5.9% to $145 billion, and FY22 sales to increase 8.6% to $510 billion. Because of its slim margins, and reinvesting, Amazon’s earnings numbers are usually a bit wonky, although not entirely reassuring.
Q4 earnings estimates are expected to be down -88%, to $0.17 per share, with FY22 earnings projected to fall -104% to -$0.13 per share. That wonkiness is illustrated by FY23 earnings which are projected to grow 1,300%, while sales are expected to increase 9.3% in the same period.
Consensus estimates continue to trend downward on all timeframes, hence the Zacks Rank #3 (Hold). Q4 estimates have more than halved over the last 90 days.