Amazon Earnings Preview

As the Everything Company, it's appropriate Amazon's earnings will have something for everyone. 

Want some insight into impact of trade tension on consumer spending? Amazon's got you. Shipping? Amazon can tell you more than UPS did. Tariffs, IT spending, the impact of Chinese trade on drone delivery? Check, check, check. Amazon promised to invest heavily wherever it saw an opportunity when the company went public nearly 30yrs ago and the company has absolutely lived up to its word.

Amazon has gone from a bookseller to a stealthy Club Store (Amazon Prime has over 200 million members and generates $40 billion a year) to a movie streaming service. The company is taking over the production of Thursday Night Football, making it a nascent television network and movie studio. Presumably, to aid in the streaming of all this content this week Amazon launched the first of what will be 3200 satellites for high-speed internet. Naturally, Amazon used founder Jeff Bezos' Blue Origin rocket company for deployment. 

And people thought he just started that company for celebrity near-space tourism.

Amazon gives good conference call (long answers, insanely smart executives, very little whining) but there won't be anywhere near enough time to answer all the questions investors will have tonight, chief among them being: Why hasn't the stock gone anywhere in 5 years?

The Street is Nervous

It's not a big secret why Amazon investors are having a hard time figuring out how to cope with all the tariff noise. Amazon's total exposure to China, through the production of branded products to, most meaningfully, Amazon's lucrative 3P retail business is enormous. As a result, the trailing numbers for Q1 mean almost nothing. The Street expects $155b revs and about $1.36 of EPS for Q1. For the year the Street expects revenue and earnings growth of about 10% to just under $700b in revenue and $6.11eps; numbers which are almost certainly going to change dramatically due to the trade issues.

As is frequently the case, I'm not much concerned with the specific numbers reported by Amazon. I'd expect there to have been a lot of demand pulled forward as consumers tried to nail down purchases ahead of price hikes. This has the makings of a "Beat and Guide Lower" type of report, which shouldn't come as a shock to anyone.

Not that Amazon will get a pass. Quite the opposite. This is one of the great companies and stocks in history but Amazon hasn't done much for anyone lately. Here are the subjects I'll be grading Amazon on tonight:

China

How big a deal is the 145% headline tariff for Amazon? Consider:

As much as 70% of all products sold by Amazon are produced in China. More concerning 80% of all Amazon's profits from retail operations come from 3P (third party) vendors, 2/3rds of which are based in China. Amazon rakes in over 60% gross margins on 3P sales (conservatively), triple its take from other online sales and more than 10x what Amazon makes on physical stores.

Amazon does a lot of other stuff but 60% of the company's revenue and 40% of its profits come from retail. Your best explanation for why $AMZN shares have been slapped down from $240 to under $190 is because a giant question mark got slapped about 30% of Amazon's net income.

Tonight Amazon has to remove some of that question mark by giving us some insight on how much higher prices are going overall and how the business will shift as sellers seek friendlier terms.

The Consumer

If McDonald's, Delta Airlines and just about everyone else on earth is telling us the consumer is bad it's safe to assume the second larget merchant on earth won't be immune. 

Amazon isn't shy about taking the blame when sales are soft. This is a good report for insight into what the consumer is doing now. If the answer is "buying cheap goods more selectively" Amazon won't deserve much of a hit. If the answer is "Cancelling their Prime subscriptions" the stock will go to $150.

Prime Day

10 years ago Amazon celebrated its 20th birthday by holding a sale. Last year Prime Day generated over $14b for Amazon and was copied throughout the retail industry. It's basically Summer Christmas and this year it might be cancelled. Or will it? Amazon managing to flex its supply chain sufficiently to be in stock with what will presumably be a massive 10th anniversary Prime Day is a good test for how well the company is executing.

CapEx

Amazon is an incredible deployer of capital. That's how you go from being a bookstore to to launching satellites instead of becoming B Dalton's. If Amazon cuts spending plans will it be because of trade wars or liquidity concerns stemming from a retail slowdown Amazon is a logistics company for more than itself. When small retailers suffer Amazon gets hit.

AWS

The bucket category for all things Mag7 about Amazon. AI, tech demand etc. Tech has been surprisingly strong so far. Amazon won't get a pass for any weakness away from retail after what we've heard from Microsoft and Meta.