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Amazon's big investment in free one-day delivery is expected to spark growth in the third quarter

Key Points
  • Analysts estimate Amazon to report revenue of $68.8 billion in the third quarter, up 21.6% from the year-ago period, according to Refinitiv.
  • But the heavier investment in faster delivery is expected to shrink Amazon's profit margins.
  • Amazon stock is up 17.3% this year, slightly below the 19.9% gain for the S&P500.
Amazon Founder and CEO Jeff Bezos addresses the audience during a keynote session at the Amazon Re:MARS conference on robotics and artificial intelligence at the Aria Hotel in Las Vegas, Nevada on June 6, 2019.
Mark Ralston | AFP | Getty Images

Amazon is expected to show more signs of growth when it reports its third-quarter earnings results on Thursday, after having spent over $800 million in speedier delivery for two straight quarters.

Analysts estimate Amazon will report revenue of $68.8 billion in the third quarter, up 21.6% from the year-ago period, according to Refinitiv. That would be the second straight quarterly improvement in revenue growth, following a 20% increase in the second quarter.

The growth rebound is a welcome sign for Amazon, whose revenue growth had dropped to a four-year low of 16.8% in the first quarter. Investors, however, are keeping a close eye on just how much the expansion is cutting into Amazon's profit margins, as it spends on improving warehouses and delivery infrastructure to make one-day shipping the default for Prime members.

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The company previously said the investment in one-day delivery cost more than the originally guided $800 million in the second quarter, and warned that it would spend over $800 million again in the third quarter to expand the program to more products and regions.

Amazon stock is up 17.3% this year, slightly below the 19.9% gain for the S&P500.

"While the one-day shipping investment makes sense for the long-term, in the near-term, it will drive lower margins than some expect," Macquarie Research wrote in a note published this week.

Here's what Wall Street is expecting for the quarter:

  • EPS: $4.62, according to analysts surveyed by Refinitiv, vs. $5.75 last year
  • Revenue: $68.8 billion, according to analysts surveyed by Refinitiv, vs. $56.6 billion last year
  • AWS: $9.1 billion, according to analysts surveyed by FactSet, vs. $6.68 billion last year

Third quarter results will also include sales from Prime Day, which the company called its biggest shopping event in history. Amazon previously said Prime Day sales surpassed those of Black Friday and Cyber Monday combined, with more than 175 million items sold over the 48-hour event.

During the third quarter, Amazon launched a number of new hardware devices, including Alexa-powered wireless headsets. It's unclear how much sales comes from Amazon's hardware business.

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Investors will look for additional commentary around the regulatory environment, as politicians from both sides of the aisle have recently called for heavier scrutiny over Amazon's business practices. There are also growing concerns over Amazon's cloud business, which is expected to see revenue growth slow to 36%, only the second time to record a sub-40% growth rate in history.

Still, the biggest question mark is the expected cost of Amazon's one-day delivery program, analysts say. The company has already hinted at getting back into an investment cycle this year, as it expands its cloud and advertising salesforce and datacenter footprint around the world, and the additional spending on faster delivery will only put more pressure on its already thin margins.

"Any recent discussion regarding Amazon's e-commerce business starts and ends with the company's free one-day shipping initiative for Prime members," Canaccord Genuity wrote in a research note published this week.

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