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Amazon Earnings Preview: 5 Things to Watch

Beth McKenna, The Motley Fool

Amazon.com (NASDAQ: AMZN) is slated to report its first-quarter 2019 results after the market closes on April 25.

As it did last quarter, the e-commerce and cloud computing giant is going into this report with investors likely not quite as confident as they were prior to its release of results for the first three quarters of last year. While Amazon trounced Wall Street's earnings expectations in all four quarters of 2018, in Q4, it released lighter-than-anticipated Q1 2019 revenue guidance. A similar scenario played out in Q3.  

While the stock has pulled back considerably since its autumn peak, shares of Amazon are still 28.9% higher than they were on April 15, 2018. That's a strong performance, as the S&P 500 has returned 11.6% over the last 12 months.

Here's what to watch when Amazon reports.

Man carrying an Amazon package walking up to a house.

Image source: Getty Images.

Key numbers

Metric

Q1 2018 Result

Amazon's Q1 2019 Guidance

Amazon's Projected YOY Change

Wall Street's Q1 2019 Consensus Estimate

Wall Street's Projected YOY Change

Revenue

$51.04 billion

$56 billion to $60 billion

10% to 18%

$59.66 billion

16.9%

Earnings per share

$3.27

N/A

N/A

$4.72

44.3%

Data sources: Amazon and Yahoo! Finance. Note: Amazon does not provide earnings guidance figures.

For Q1, Amazon expects operating income of $2.3 billion to $3.3 billion, representing growth of 21% to 74% year over year. For context, operating income growth for the previous four quarters was as follows: 78% (Q4), 966% (Q3), 378% (Q2), and 92% (Q1). For 2018 overall, operating income increased 203% -- in other words, it tripled. 

For greater context, here are the company's year-over-year revenue and earnings growth results for the previous four quarters:

  • Q4: Revenue and adjusted EPS rose 20% and 180%, respectively.
  • Q3: Revenue and EPS jumped 29% and 1,006%, respectively.
  • Q2: Revenue and EPS soared 39% and 1,168%, respectively.
  • Q1: Revenue and EPS surged 43% and 121%, respectively.

North America's operating income

One highlight of Amazon's 2018 financial results was its torrid operating income growth in North America. This segment is by far the company's largest by revenue, accounting for nearly 61% of its net sales of $232.9 billion last year. So, North America's operating income growth of 156% year over year was a major driver of Amazon's overall increase in profitability in 2018.

Notably, this segment came within a hair of generating the same amount of operating income as Amazon Web Services. In 2018, North America posted $7.27 billion in operating income, while the cloud-computing service brought in $7.30 billion. 

Amazon Web Services' growth

The company's other big financial story last year was the continued impressive growth of AWS. In 2018, the cloud service's revenue jumped 46.9% to $25.66 billion, and its operating income rocketed 68.5% to $7.30 billion. 

The segment's operating margin (operating income divided by revenue) expanded to 28.4% last year, from 24.8% in 2017. On a quarterly basis, operating margin was 29.3% in Q4, 31.1% in Q3, 26.9% in Q2, and 25.7% in Q1 2018. So sequentially, this metric rose through Q3, but dipped a bit in Q4. One quarter, however, doesn't make a trend, since Amazon's spending on growth initiatives can be somewhat lumpy. 

Cash flows

Last quarter, operating cash flow rose 67% year over year to $30.7 billion for the trailing 12 months. Free cash flow (FCF) more than doubled to $19.4 billion, from $8.3 billion.

For companies such as Amazon that invest heavily for growth, operating income is the better cash flow metric to watch. Moreover, it's often a better metric to gauge a company's financial performance than are operating income and net income, or "earnings," as these are merely accounting measures.

Q2 2019 guidance

The market's reaction to Amazon's report will probably have more to do with the company's guidance for the Q2 2019 than with its results for the first quarter.

So you should know that for Q2, analysts are projecting revenue to rise 18% year over year to $62.38 billion, and EPS to jump 24.5% to $6.31.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.