Amazon (AMZN) shares moved firmly higher Thursday heading into its closely-tracked first quarter earnings after the close of trading, with investors focused on the impact of sweeping cost cuts and an improved spending backdrop on the online retail and tech giant's bottom line.
CEO Andy Jassy has unveiled plans to pare more than 27,000 jobs from Amazon's 1.5 million world-wide workforce so far this year, citing an "uncertain and difficult" global economy. That still may not be enough to 'right size' the group's business heading into a weaker U.S. economy over the second half of the year, however, while charges related to the layoffs, as well as increasing spending on AI and web services developments will likely erode at least some of Amazon's first quarter profits.
"Over the last several months, we took a deep look across the company, business by business, invention by invention, and asked ourselves whether we had conviction about each initiative’s long-term potential to drive enough revenue, operating income, free cash flow, and return on invested capital," Jassy told investors in his annual letter to shareholders on April 13.
"There are a number of other changes that we’ve made over the last several months to streamline our overall costs, and like most leadership teams, we’ll continue to evaluate what we’re seeing in our business and proceed adaptively," he added.
Analysts are looking for Amazon to post a bottom line of 21 cents per share, down 43.2% from last year, with overall revenues rising 7% to $124.5 billion. Amazon itself forecast operating income of between zero and $4 billion on revenues in the range of $121 billion to $126 billion for the three months ending in March.
Online retail sales will form the bulk of that total, with analysts forecasting a figure of $51.12 billion. Third-party seller services revenues are likely to rise 10% from last year to $27.9 billion with subscription services also up 10% to $9.25 billion. Ad sales likely rose rose 15% to $9.06 billion, although a better-than-expected first quarter update from Meta Platforms (META) could see that figure trending higher.
"With retail sales continuing to moderate, the profitability of Amazon's retail business will be a main focus for investors," said JMP Securities analyst Nicholas Jones. "Similarly, with enterprise spending facing headwinds amid macro uncertainty, investors will look for Amazon Web Services to demonstrate resilience in growth and profitability."
Investors will also focus on Amazon's near-term outlook, a solid benchmark for domestic GDP growth, following a better-than-expected update from smaller rival eBay (EBAY) last night and solid first quarter spending data from credit card company Visa (V) earlier this week.
eBay, which topped the Street with an adjusted bottom line of $1.11 per share, forecast current quarter revenues in the region of $2.47 to $2.54 billion, even amid what CEO Jamie Iannone called an "uncertain macro economic environment across the globe with inflation and rising interest rates and pressured consumer confidence."
D.A. Davidson analyst Tom Forte, however, thinks the Street might be too optimistic on Amazon's growth rates over the coming months.
“We believe investors are expecting e-commerce sales to improve at a rate that is not consistent with the historical performance during recessions,” said Forte, who carries a 'buy' rating with a $134 price target on the stock.
“As one of the largest players in e[1]commerce, we believe that the steps Amazon has taken towards rightsizing its cost structure, as reflected by its headcount reductions, will slow both its own and the category's growth rate going forward,” he said.
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Amazon Web Services, one of the company's most-reliable profit engines, is likely to see revenues grow 15% from last year to $21.2 billion, with focus on its rate of acceleration into the second half of the year as business spending improves and AI investments begin to pay off.
Jassy may also provide further detail on Amazon 'Bedrock', a cloud service for developers based on large-language and machine learning models that offers a challenge to Microsoft's (MSFT) OpenAI.
"We think the bar seems very achievable for the categories that matter most in Online Stores, Advertising, and AWS," said Benchmark analyst Daniel Kurnos, who carries a 'buy' rating with a $130 price target on Amazon.
"It is notable that Microsoft cloud results appeared to come in better than feared, although Amazon has already called out several near-term headwinds that could limit any immediate upside to that highly watched segment," he added. "Still, as long as the profit centers perform as expected, it should give Amazon the platform to start beating on op income both in the quarter and on the 2Q guide."
Amazon shares were marked 2.5% higher in pre-market trading to indicate an opening bell price of $107.57 each, a move that would extend the stock's year-to-date gain to around 28% with a value of just over $1.1 trillion.
