- Amazon is due to report fourth quarter 2015 earnings on 28th January 2016 after market close.
- The company managed to report surprise profits during the preceding two quarters.
- Will Amazon extend this streak?
Giant online company Amazon (NASDAQ:AMZN) is expected to report fourth quarter 2015 earnings on 28th January 2016 after market close. The consensus on Wall Street is for Amazon to report EPS of $1.62, a huge 260% Y/Y improvement over $0.45 the company reported during the previous year’s comparable quarter. Amazon itself had issued the following guidance for the fourth quarter:
- Revenue of $35.5B to $36.75B, or 14%-25% Y/Y growth.
- Operating income in the range of $80M-$1.28B, the mid-point of which is 15% higher than operating income reported for Q4 2014.
You will notice that it’s quite hard to predict much about Amazon’s expected profitability due to a couple of reasons. The first is that unlike most companies that issue EPS guidance, Amazon typically issues operating income guidance. The second is that Amazon typically gives a very wide range for operating income guidance.
There are, however, a few reasons that suggest that Amazon could once again have managed to turn a profit during the fourth quarter. Amazon managed to report surprise profits during the second and third quarters at a time when Wall Street expected losses. Amazon had issued second quarter guidance of operating income (loss) of $(500)M to $50M. Working with these numbers, Wall Street modeled for Amazon to report non-GAAP EPS of -$0.15 yet the company posted non-GAAP EPS of $0.19, a huge 226.67% beat. During the third quarter, Amazon had issued operating income (loss) guidance of $(480)M to $70M which led Wall Street to model for non-GAAP EPS of -$0.1. Amazon, however, managed to post non-GAAP EPS of $0.17, an astounding 270% surprise beat.
Amazon’s operating income range of $80M to $1.28B for the fourth quarter is actually the biggest spread issued by the company in its history. But unlike the previous two quarters, Amazon is positive that its operating income will be in the black even in a worst case scenario. In any case, history shows that Amazon has a tendency to hit the higher ranges of its revenue and operating income guidance.
Amazon has exceeded earnings expectations for the last four consecutive quarters, and could extend this strong streak when it reports fourth quarter earnings.
Amazon Earnings Surprise History
Still, one question that begs for an answer is why did Amazon issue such a large range for its fourth quarter operating income guidance?
Amazon capex could be on the rise once again
There are two main reasons that explain why Amazon was able to report a surprise profit during Q2 and Q3: lower capex and rapid growth of AWS. Amazon spent $4.9B on capex during 2014. During the first three quarters of 2015, the company spent $3.3B, which tracks to $4.4B annualized, or 10.2% lower than 2014 capex.
AWS has been growing revenue at an admirable clip. But the cloud platform has been expanding its profits at an even faster rate, as Amazon has been scaling back on building out the cloud after years of heavy investments.
Source: Business Insider
But Amazon’s capex could shoot right back up. During the fourth quarter, there were reports that Amazon has plans to buy or lease 20 Boieng 767 jets for delivery services. In this article here, I discussed how it would cost Amazon ~$122M /year to lease and operate the jets. There are also reports that Amazon could start using drones for delivery as early as 2016. That could mean another $200M in capex and another $200M in operational costs/ year. We do not know as yet how far Amazon has gone with both plans. That could explain the unusually large spread in the company’s operating income guidance.
In the final analysis, what will really matter to Amazon investors when the company reports fourth quarter earnings is whether it will be able to extend its profitability streak and whether its profits will keep expanding. And by the current look of things, Amazon might very well achieve both counts. Amazon stock, caught up in the broad market selloff, is down 15.4% YTD. But another profitable quarterly report could change that.