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Will Amazon's (AMZN) Latest Initiatives Bolster Its Q3 Earnings?

Christopher Vargas

Amazon AMZN is on deck to report their third quarter results after the closing bell on Thursday, October 24. The company’s shares have risen around 18%, which is right around the e-commerce market’s YTD gain. The tech giant reported that its two-day Prime Day event in July was the largest shopping event in Amazon history, and investors will be looking for the new discount holiday to bolster Amazon’s Q3 sales.

Amazon has also aimed a campaign at dollar store chains after the company changed its delivery policy. Will Amazon’s third quarter impress Wall Street and send investors pouring into the stock or will it underwhelm?

Amazon Takes Jab at Discount Stores

While Amazon and e-commerce in general are largely blamed for igniting the retail store apocalypse, discount stores like Dollar General DG and Dollar Tree DLTR were thought to be immune from the epidemic, as Amazon required a set dollar amount needed to spend to qualify for free shipping.

Dollar stores have kept their hold on the market by opening stores near lower income areas and by creating a “treasure hunting” experience that gets consumers in the store and drives up the average transaction ticket. Other companies like Target TGT scatter their seasonal discounted items to create a similar atmosphere for their consumers and recently saw comp sales grow 3.4% in Q2 with their average ticket price increasing roughly 1%.

To compete with the discount retailers Amazon is allowing a slew of products priced below $5 to qualify for free next-day shipping through Amazon Prime. The e-commerce giant is hoping that the convenience of quickly finding a small item then receiving it in the mail next day will outweigh the excitement of physical discovery in a traditional brick and mortar store. While this may seem like a deeply unprofitable strategy, the use of Amazon's own logistics network and subsidies from participating brands could mitigate the impact on the company's bottom line.

This isn’t the first time Amazon has tried to tap the discount retail market. It previously launched its “add-on” feature that identified inexpensive items that could be added to an order valued at $25 or more and, if shipped to the same address, qualify for free shipping. They also lowered their Prime membership for qualifying customers and instituted installment plans.

Outlook

Despite the company’s previous efforts to tap the discount market, Amazon has struggled to make its presence felt. Last October, Piper Jaffray PJC estimated that only 60% of US households with annual incomes between $21,000 and $40,000 had Prime subscriptions, versus nearly 85% of higher-income households.

Now that Amazon announced that Prime Day was "once again the largest shopping event in Amazon history," Wall Street will be anticipating a significant boost in Q3 sales. The company decided to extend their annual event from 36 to 48 hours, which could potentially provide some positive surprises in the firm’s top-line. Amazon typically doesn’t report the exact revenue that Prime Day brings in, but estimates from last year’s event are over $4 billion.

Investors should also closely monitor the company’s Amazon Web Services, which has continued to grow as it maintains its lead in the cloud computing market. As the world's ongoing digital transformation continues, AWS could continue to be the industry leader. Some think Amazon's cloud computing business alone could be worth as much as $400 billion.

Q3 will also be the first full quarter of results since it announced next-day shipping for many items. The company said back in April that faster shipping would initially be available on about 100 million items that previously shipped within two days and that that number would grow in the future.

Our Q3 consensus estimates forecast Amazon to see an earnings decrease of 22.43% to $4.46 per share while sales could reach $68.57 billion for a 21.2% hike. Online stores are projected to grow 15.4% while physical stores see a 2.44% increase. The firm’s Amazon Web Services is anticipated to nearly double from the year ago quarter to $9.13 billion and subscription services are forecasted to climb 34.7% to $4.98 billion.

Bottom Line

Amazon continues to apply pressure to a wide array of companies, even those that were once thought safe from the ecommerce giant’s expansion. The company is trying to force its way into the discount retail market, and time will tell if its latest initiatives will successfully pry consumers away from traditional discount stores. The lead it holds within the cloud computing market will be vital to the company’s future as AWS is the primary source of its profitability and modern companies continue to move towards cloud computing.

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Amazon.com, Inc. (AMZN) : Free Stock Analysis Report
 
Piper Jaffray Companies (PJC) : Free Stock Analysis Report
 
Dollar Tree, Inc. (DLTR) : Free Stock Analysis Report
 
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Target Corporation (TGT) : Free Stock Analysis Report
 
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