Amazon earnings: ‘The good news is the consumer is still spending. The bad news is they’re not spending on e-commerce.’

When Amazon
AMZN,
+3.53%
reports third-quarter earnings on Thursday afternoon, investors will find out if those concerns are valid. That anxiety is largely based on perceived waning demand for online purchases as customers save their spending for “revenge travel” and concerts, or for grocery and gas bills amid decades-high inflation.

Retailers across the U.S. are cutting prices to clear jammed-up inventories after supply-chain delays and consumers’ pivot to basics left stores with loads of unwanted clothing, electronics and offseason goods. Forte said Amazon’s decision to hold a second Prime Day shopping event this year suggested the online retailer may be dealing with similar issues.

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“One interpretation of having that event is that Amazon needed the opportunity to unload some excess inventory, or Amazon provided the third-party sellers on its platform the opportunity to do so,” he said.

However, Sucharita Kodali, an analyst at Forrester Research, told D.A. Davidson analysts that Amazon has revamped Prime Day every year, according to a research note this week. And she said the decision could help Amazon by pulling typical holiday sales into October and “(blunting) the impact of competitors’ promotions in November and December.”

The Amazon fears don’t end with online shopping, though. Because Amazon is growing internationally, the stronger dollar will cause issues. There are also questions about whether large entertainment investments — such as Thursday Night Football and “The Lord of the Rings: The Rings of Power” — will pay off. And as the winter holiday deal season creeps further into fall every year, analysts will likely be watching for any clues on whether consumers are growing more cautious.

Demand for Amazon’s AWS business, Forte said, could be propelled by businesses’ efforts to save money on technology, as they contend with their own rising costs. But he cast doubt on the company’s efforts to make money on the NFL via Thursday Night Football and “The Rings of Power,” an adaptation of J. R. R. Tolkien’s fantasy novels.

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Different media reports have put the cost of rolling out “The Rings of Power” — a prequel series to Tolkien’s books available on Amazon Prime — at anywhere from $715 million to upward of $1 billion. Amazon’s 11-year deal to bring Thursday Night Football games to Prime Video this year will cost it roughly $1 billion annually, according to reports.

But after Amazon raised its U.S. Prime membership fee by $20 this year to counterbalance rising costs, Forte said he wondered how many Amazon shoppers ultimately cared about football and fantasy.

CNBC reported that Amazon’s first Thursday Night Football game drew record Prime sign-ups in a matter of hours. While the Rotten Tomatoes critics rating for “Rings of Power” stands at 85%, the average audience score for the series is 39%.

“I fully expect Amazon to talk as glowingly as possible about both ‘Lord of the Rings’ and Thursday Night Football, given that they’re huge investments,” Forte said. “But I think they have a risk of losing subscribers to Prime. You don’t want to pay 20 bucks more if they’re not Tolkien fans or they’re not football fans.”

Still, Wall Street expects Amazon to swing to a profit in the third quarter, after two consecutive quarterly losses due to rising costs and its investment in struggling electric-vehicle maker Rivian Automotive Inc.
RIVN,
+3.87%.
And Amazon’s AWS cloud-services business is expected to remain a bright spot on the company’s earnings statement.

But following two straight losses, the results will also arrive as Amazon tries to tighten up operations amid concerns of a recession. Earlier this month, the New York Times reported that Amazon would pause corporate-level hires in its retail business. Amazon has also pulled back on opening new facilities, some data shows, and is halting testing of a home-delivery robot, according to reporting from Bloomberg.

What to expect

Earnings: Analysts polled by FactSet expect Amazon to earn 22 cents per share in the third quarter, down from 31 cents in the period a year ago. Contributors to Estimize — a crowdsourcing platform that gathers estimates from Wall Street analysts as well as buy-side analysts, fund managers, company executives, academics and others — are projecting earnings of 26 cents a share on average.

Amazon reported losses in the first and second quarters, following a steady drop in Rivian’s stock price over this year. Amazon’s loss in the first quarter was its first in seven years.

Revenue: Analysts expect Amazon to report third-quarter net revenue of $127.49 billion, according to FactSet, up from $110.81 billion a year ago. Estimize contributors are projecting $127.88 billion in revenue.

Stock price: Amazon stock has tumbled 30% so far this year. That’s worse than the S&P 500 index
SPX,
+2.37%,
which is down 23% year-to-date.

What analysts are saying

Amazon is looking to cut back amid signs of more reserved holiday shoppers getting less bang for their buck. Analysts at Deloitte this week said they expected rising prices to tame consumer holiday purchases. They expect roughly flat year-over-year holiday spending this year, at an average of $1,455 per customer — an amount that reflects spending on gifts, non-gift purchases and things like entertainment. But they also said shoppers planned to buy nine gifts for family and friends this year, compared with 16 last year.

Some analysts view Amazon’s cutbacks as a positive. UBS analysts trimmed their price target to $165 from $180 ahead of the report, but kept a buy rating and wrote, “the broader arc is one of more discipline, greater efficiency and higher margin.”

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“We continue to see Amazon driving margin improvement, driven by (1) higher fees across Prime, FBA, fuel surcharges, and holiday shipping surcharges, (2) lower energy costs (~20% of shipping) and falling freight costs, (3) rationalizing FC capacity (~10% of the square footage has been closed/canceled/delayed), (4) reducing employee oversupply, evident in the return of seasonal hiring bonuses and higher wages, (5) more discipline around growth investments (shutting physical stores, cutting Amazon Care, scaling back Grand Challenge),” they wrote.

Aside from e-commerce, UBS analysts also see margins being helped by continuing growth in Amazon Web Services and Amazon’s growing advertising business, which produce higher margins than the retail business.

“We think this trend shows up in 3Q / 4Q outlook and supports multiple expansion of AMZN shares,” they wrote.

The fourth-quarter outlook could be the most important information Amazon executives provide for the path of the stock. Analysts on average expect holiday-season revenue of $155.35 billion heading into the report, according to FactSet.

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“We’re most focused on 4Q guidance following Amazon’s Prime Early Access sale in mid-October and our view that overall operations are becoming more efficient,” Citi analysts, who have a buy rating and $185 price target on the stock, wrote in a preview. “Of the $2.5 billion of Amazon’s $6 billion of incremental expenses during 1Q expected by the end of 3Q largely related to inflation costs and FC efficiencies, given improving shipping and transportation costs along with increased FBA fees (offsetting inflationary pressures somewhat), we look for continued progress here for 4Q.”

In total, 47 of the 52 analysts tracked by FactSet rate Amazon stock the equivalent of a buy, while four call it a hold and only one rates a stock as sell. The average price target as of Friday morning was $163.29.