Wall Street looks for signs of Amazon's investments paying off

Jeff Bezos
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Jeff Bezos

When online retail giant Amazon reports third-quarter earnings after the bell Thursday, investors will be looking for updates on a range of recent initiatives and acquisitions from the company that rarely turns a profit.

Some pertinent questions: How much are its efforts to attract and retain customers hurting its earnings growth? Are small businesses adopting Amazon Local Register? How's the roll-out of same-day delivery service in New York and five other cities going so far? And what of its recent $1 billion acquisition of video game streaming site Twitch?

Analysts expect Amazon's revenue to grow 22% to $20.84 billion, while earnings are expected to plummet to a loss of 74 cents per share, compared to a 9 cent per share loss in the year-ago quarter.

Wedbush analyst Michael Pachter wants to see how the company's various investments in enhancing its customer experience will impact profits. One example is Prime Music, the ad-free on-demand streaming music service that debuted in the second quarter. Pachter expects spending on Prime Music to grow to $500 million a year. Total spending on content is expected to reach $2.5 billion in 2015, up from $2 billion in 2014, says Pachter.

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How will all those investments pay off? Pachter has a neutral rating on the stock for now.

"While recent announcements have given us increased visibility into Amazon's revenue growth...We are not convinced that the company will share sufficient details about future spending to allow us to accurately model profit growth, and it may take time before EPS grows sufficiently to justify its share price," he said.

Pachter predicts Amazon's $970 million acquisition of Twitch Interactive will have a "minuscule impact on Amazon's revenue growth or profitability in the near term."

BMO Capital Markets analyst Thomas Andrews says he expects the company to continue to "invest heavily in growth-- adding to its fulfillment capabilities, looking to drive its Kindle ecosystem, and expanding its Prime subscriber base." Though Andrews, who rates the stock "Market Perform," projects solid growth prospects for the foreseeable future as it invests in new businesses, he warns that the heavy spending, "which is hampering profitability in the near term, placing pressure on the margin structure."

With the holiday shopping season coming up, Target's stepping up competition with Amazon. The company just announced free shipping on all online orders through December 20, and same-day pickup within an hour.

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