Amazon Reports Earnings on Thursday: 5 Key Themes to Watch

Amazon investors will get a closer look at the impact of COVID-19 on Amazon's business, from commerce and cloud to its operating margins.

Amazon's latest earnings release is around the corner, and with it, investors will get a much clearer picture of what the COVID-19 crisis means for Amazon. 

Amazon  (AMZN) - Get Report shares are up 60% year to date amid bullish sentiment surrounding Amazon's strength in both ecommerce and cloud technology, two sectors that have seen rapid adoption over the past few months.

"With what’s happened over the last 150 to 180 days, people are migrating their on-premise software to the cloud," said Yancey Spruill of DigitalOcean, a cloud infrastructure firm. "I would expect that [Amazon's] results would reflect that."

On average, Wall Street analysts are expecting earnings of $1.48 per share on total sales of $81.4 billion. Here are key themes to watch."

1. E-commerce Strength

All signs point to a strong quarter for Amazon's e-commerce business. Stay-at-home mandates and retail store closures drove an unprecedented surge in online shopping last quarter, with much of that action flowing to Amazon. Despite high expectations, Bank of America analyst Justin Post sees "strong revenue upside" in Amazon's upcoming release, and Q3 guidance from Amazon that could err on the conservative side. That would present a strong set-up for a huge fourth quarter, with "record penetration gains into the holiday season, Prime Day in 4Q, and mall traffic likely still under pressure," Long wrote. 

2. COVID-19 Response

Amazon's profits are expected to be much lower than normal, given heavy spending on its COVID-19 response. The company cautioned investors months ago that it would plow as much as $4 billion into hiring, delivery infrastructure, and safety measures. Further details on the COVID spending, and how long the spending will last, could also shed light on operating margin trends: "Did the company spend at expected levels; did the spend help the company get back to par in terms of speed of delivery; how much more does AMZN need to spend to get back to normal?," wrote RBC's Mark Mahaney this week. RBC is modeling for 1.8% GAAP operating margin in Q2, down 300 basis points year-over-year. 

3. AWS Results

Amazon investors will get a better look this week at how COVID-19 has impacted AWS, for better and for worse. Analysts expect some tailwinds for the segment from heavier Internet usage and faster cloud adoption brought about by the pandemic. But AWS customers in economically hard-hit industries could offset gains. Rival Microsoft  (MSFT) - Get Report reported deceleration in its Azure segment last week; Amazon's AWS could likewise show modestly lower growth.  On average, analysts are expecting AWS revenue of $11.02 billion for Q2. 

4. Advertising Gains

The recent surge in e-commerce demand could have another side benefit for Amazon: More dollars spent on its growing advertising platform. Research shows ad spend up significantly in certain Amazon categories during the COVID-19 pandemic, which could add up to a strong quarter for the highly profitable segment: "AMZN’s ad revenue platform proved to be the most resilient in the March quarter (among our ‘Net ad names), and we will be looking to see if it is true for the June quarter as well," added RBC's Mahaney, estimating ad revenue growth above 40% in Q2. 

5. Prime Updates 

Amazon doesn't disclose the number of Prime subscribers on a quarterly basis, but signs point to an uptick in memberships over the past few months. An RBC survey showed a "material increase" in Prime adoption this year, and Amazon may provide commentary on what the company saw last quarter and whether they expect new members to stay around after the pandemic has subsided. Amazon Prime memberships are relatively sticky, meaning subscribers are unlikely to cancel, and Amazon management may give either a qualitative or quantitative update on how Prime is performing.