Amazon Q3 FY2021 Earnings Preview: Key Insights and What to Expect

Focus on Amazon Web Services (AWS) revenue growth

Highlights to Watch

• Analysts predict EPS of $9.31, down from $12.37 in Q3 FY 2020.
• AWS revenue is forecasted to continue growing robustly year-over-year.
• Overall revenue growth expected but at less than half the rate seen in Q3 FY 2020.

Amazon.com Inc. (AMZN) has experienced remarkable revenue and earnings growth over the past year, fueled by the pandemic-driven surge in online shopping and increased demand for cloud computing. Confident in the continued expansion of e-commerce, Amazon is ramping up hiring, announcing plans in September to add 125,000 fulfillment and transportation workers across the U.S., alongside 40,000 corporate and tech employees.

Investors will closely monitor Amazon’s Q3 FY2021 earnings report on October 28, 2021, to assess whether the company can sustain its strong financial momentum. However, forecasts suggest potential headwinds, with EPS expected to decline and revenue growth slowing to its lowest pace in over four years.

Attention will also focus on Amazon Web Services (AWS), the company’s high-margin cloud computing segment. While AWS represents a smaller portion of total revenue, it remains the primary driver of operating income. Analysts anticipate AWS revenue growth to continue but at a moderated pace compared to the previous quarter.

Amazon’s stock has lagged behind the broader market over the past year. After tracking the market closely early on, the shares began underperforming in November 2020, with the gap widening notably from mid-February 2021. Despite a brief recovery between June and July, the stock currently trails the S&P 500 by nearly 30 percentage points, delivering a 5.3% total return versus the S&P 500’s 34.5% over the last 12 months.

Amazon’s Recent Earnings Performance

In Q2 FY2021, Amazon surpassed earnings expectations with EPS up 46.8% year-over-year, marking the slowest growth rate since Q2 FY2020. Revenue rose 27.2% YOY but missed consensus estimates, reflecting the slowest revenue growth since Q1 FY2020. The company highlighted an uptick in businesses accelerating cloud migration, boosting AWS revenue growth.

During Q1 FY2021, Amazon exceeded analyst forecasts on both earnings and revenue, with EPS soaring 215.2% YOY—the fastest growth since Q3 FY2018—and revenue increasing 43.8%, the highest quarterly growth in over four years. Prime Video streaming hours surged more than 70% YOY.

For Q3 FY2021, analysts expect mixed results: EPS is projected to decline 24.7% YOY, the first drop since Q1 FY2020, while revenue is forecasted to grow 16.3% YOY, the slowest pace in at least 19 quarters. Full-year FY2021 estimates call for EPS and revenue growth of 26.1% and 23.2%, respectively, both significantly slower than FY2020’s rates.

Source: Visible Alpha

Focus Metric: AWS Revenue Growth

Investors will pay particular attention to AWS, Amazon’s cloud computing platform offering a wide array of on-demand services such as compute, storage, databases, analytics, and machine learning. AWS serves startups, enterprises, government bodies, and academia, generating substantially higher margins than Amazon’s retail operations.

In FY2020, retail and subscription services accounted for about 88% of Amazon’s total revenue, while AWS contributed just 12%. However, AWS was responsible for 59% of operating income, underscoring its critical role in profitability.

AWS revenue growth has gradually decelerated over the past five years, despite a brief surge in FY2018. Annual growth was 69.7% in FY2015 and slowed to 29.5% in FY2020. In FY2021’s first half, growth accelerated—32.1% YOY in Q1 and 37.0% YOY in Q2. Analysts project AWS revenue growth will moderate to 33.3% YOY in Q3 FY2021, still outpacing any quarter in the previous fiscal year. For the full FY2021, AWS revenue is expected to increase 33.2%, accelerating from FY2020’s pace.

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