Amazon Earnings Preview: Amazon's Q4 Margins Are Expected to Rise Due to Advertising Revenues and AWS Growth

• Amazon is expected to post quarterly earnings of $0.8 per share in its upcoming report, which represents a year-over-year change of 2559%.

• Revenues are expected to be $166.25 billion, up 11.43% from the year-ago quarter.

• Amazon has beaten revenue and EPS expectations in 5 of the past 8 quarters.

Amazon Prime Video is set to get advertising starting on Jan.29, an initiative that could be worth billions of dollars this year and significantly more over time, according to several Wall Street firms.

The insertion of ads into content such as Fleabag, The Lord of the Rings: The Rings of Power, Creed III and more could be worth $1.3 billion this year and $2.3 billion in 2025, investment firm MoffettNathanson said on last Friday.

Morgan Stanley was even more bullish, as analyst Brian Nowak said recently it could be worth $3.3 billion this year and $5.2 billion in 2025.

Prime Video ads could account for $6.47 billion, $8 billion and $9.37 billion in incremental revenue in 2026, 2027 and 2028, respectively, Nowak added.

Amazon could see an incremental $3 billion in ad revenue and $4.8 billion in incremental advertising plus subscription revenue this year, Bank of America said earlier this month.

Amazon announced this past September that it would include "limited" advertisements as the company seeks to keep up with rising costs for content and increase revenue. Prime subscribers in the U.S., U.K., Germany and Canada will be the first group to see ads. Those in France, Italy, Spain, Mexico, and Australia will see the ads later in the year.

Amazon will also allow Prime Video users to opt out of seeing ads for an additional $2.99 per month for U.S. members, with pricing details set to come for other countries. A Prime subscription in the U.S. costs $139 per year.

In an update to clients, the analysts raised their price objective on Amazon stock to $185 per share from $168, noting that AWS revenue growth that is expected to reach 17% by the fourth quarter should close the gap to its peers.

As well, Amazon management sees a "gigantic" opportunity for AI-driven demand. Amazon's Inferentia and Trainium chip technology could also see greater appreciation by Wall Street, the analysts acknowledged.

“Amazon has been rolling out new versions of AI chips which it said offer enhanced performance and announced plans to invest up to $4 billion in Anthropic, a US company generating AI systems and large language models,” the analysts added.

Analysts at Bank of America, however, cautioned that risks for the stock this year include a potential slowdown in consumer spending, uncertainty surrounding AWS competition, and a competitive threat from China's TikTok.

The analysts see 4Q revenue of $170 billion, an 11.9% year-over-year increase and up 0.6% from their previous estimate.

The Wedbush analysts also see Amazon's 4Q operating income exceeding management’s guidance range of $7 billion to $11 billion and the Wall Street consensus. They project 4Q operating income of $11.5 billion with a 6.9% margin, an increase of 4.6% from their previous estimate.

This is 12% above the consensus estimate and implies $313 million of sequential operating income when compared to the third quarter.

“Operating margin expansion is supported by rising fulfillment utilization, easing inflation, limited corporate headcount growth, and continued mix shift to higher-margin advertising revenue,” the analysts wrote in a note to clients.

“With strong topline trends in place during 4Q across Amazon’s retail and advertising segments and management’s ongoing cost discipline and commitment to margin expansion, our bias for 4Q operating income is to the upside and we are raising our estimates accordingly.”

Source: Seeking Alpha, Yahoo Finance, Proactiveinvestors