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What to watch in Amazon earnings

Prime and Amazon Web Services' path to more profit will be in focus as Wall Street watches Amazon's earnings report after Thursday's closing bell.

Amazon is not known for always turning a profit, as CEO Jeff Bezos plows money into investments — but this time, the company is expected to post positive earnings for the fifth-straight quarter. Analysts expect Amazon to report earnings of $1.11 per share on revenue of $29.55 billion in the second fiscal quarter, according to a Thomson Reuters consensus estimate.

"What has always pressured the profitability has been the aggressive spending that Bezos has done," said Edward Jones analyst Josh Olson. "We see him continuing to invest in fulfillment centers, video content ... and then data centers. The one difference though is that we might have reached a tipping point in a long-term arc of the operating margins. The amount of spending isn't going to outweigh the profitability every other quarter."

Ronald Josey of JMP Securities concurred, citing Amazon's scale. The company has invested in delivery after high fulfillment costs weighed on gross margins in the holiday quarter last year.

"There's a lot of things that make it a more structurally profitable business," Josey said. "Yes, they're investing in Echo, in video series. But we believe they're at a scale, that it's inherently more profitable than it was even a year ago."

Amazon President, Chairman and CEO Jeff Bezos
Mike Segar | Reuters
Amazon President, Chairman and CEO Jeff Bezos

Analyst Ben Schachter of Macquarie Capital cites structural and competitive strengths of Prime, Amazon's membership program, and AWS, the company's enterprise cloud offering, as primary drivers of the company's outlook. Josey and Olson said they'd be looking toward margins.

"Notably, we expect 3Q guidance is likely to be a positive based on a larger than expected Prime Day, a lack of pricing pressure on AWS, and momentum in its [third-party seller] business," Schachter wrote in a research note.

Amazon's annual membership event earlier this month helped the company post its biggest-ever day of sales. While that won't be reflected in Thursday's results, Wall Street will look for guidance that more consumers are joining Prime, thanks to the benefits of free shipping, new media content and devices like the artificially intelligent Echo.

Fees from a growing pool of third-party sellers could also boost Amazon's bottom line, Josey said.

"You're seeing margins expand here," Josey said. "I think it expands because you have more members on Prime. You get music, photos, free delivery. People tend to use the service more to get their money's worth."

Then there's AWS, a cloud market leader expected by Olson to grow about twice as fast as the core e-commerce business. Thursday's report comes after Microsoft reported a healthy 102 percent growth rate in its cloud product, Azure.

Olson and Josey expect AWS to have operating margins in the high 20 percent range during the quarter. But guidance on the future of the product will be key: Olson sees margins compressing over time as competition heats up. But Josey sees positive commentary in the market as something that will draw more businesses to all cloud products, including Amazon.

"What's good for others in the industry is likely good for AWS," he said.

Other color expected from Thursday's earnings include updates on international expansion. The company this week announced the launch of Prime in India, as well as a $3 billion investment there.

"This [stock] is one that tends to overreact both ways. It moves a lot to the upside on good news and moves down a lot on bad news," Olson said. "It's still going to be volatile amid large-cap tech. But we believe in Bezo's vision, we think he's a savvy investor. He's made some good investment decisions. He does it in a way that gives him a good competitive advantage. "

Disclosures: JMP Securities currently makes a market in Amazon.com and expects to receive or intends to seek compensation for investment banking services from Amazon.