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Amazon share price: will costs hit earnings?

Amazon share price: will costs hit earnings?

Ahead of Amazon’s Q3 results on Thursday, the tech giant’s name has recently been associated with such areas as government contracts heavy expenditure and accusations of improper working conditions. These reports have left the conglomerate painted in an uncertain light.

With Amazon’s second-quarter results undershooting expectations, could these factors weigh on the Amazon share price?

AWS supporting Amazon share price  

While Amazon has been throwing a tremendous amount of money at its products, it seems one product, in particular, has continued to stick. Amazon’s Web Service (AWS) has been the sustaining factor for the company; making up 13% of Amazon’s profit in Q2, and accounting for over half of Amazon’s operating income in the previous quarter. Amazon is optimistic heading into Q3, bullishly telling investors to expect a 24% sales increase to as much as $70bn, in large part thanks to the revenue from its cloud computing and Prime services. However, it’s estimated that Amazon’s operating profit will fall from $3.7bn to between $2.1bn and $3.1bn, which in turn could widely effect Amazon’s share price.

Contracts for the cloud

With Amazon’s AWS services currently already controlling the largest part of the cloud computing market, it’s currently close to securing its most lucrative deal to date – a $10bn military contract with the Pentagon’s Department of Defense. The contract in question is with the Joint Enterprise Defense Infrastructure programme (JEDI), who are looking for a sole provider for the contract. As one observer put it, Amazon “has spent the last decade carefully working its way towards the heart of Washington, and is on the brink of becoming one of America’s largest defense contractors” [1]. Confirmation of an agreement will instate Amazon as a major player in US defence, a deal which could help to push Amazon’s share price back up towards the one-year highs seen in July.  

Cutting delivery times

Amazon’s potential decrease in Q3 operating profit is largely attributed to its $800 million expenses towards shipment efficiency for its Amazon Prime service. The online retail giant is aiming to provide next-day shipping service on low-cost products without the need for a minimum spend. The excessive spending to provide this service has seen Amazon’s stock suffer, with a 10% drop in its share price since Q2. Q2 earnings per share (EPS) came in at $5.22, which was below consensus expectations.

Complaints stacking high in the warehouse

The working conditions within Amazon factories, both in the US and UK, have recently been under scrutiny. There has been a trend of reoccurring reports about the inhumane working conditions employees are subject to. In response to this, founder, CEO and president of Amazon, Jeff Bezos, has attempted to ensure the reputation of Amazon’s warehouse working conditions by releasing an ad campaign depicting cheerful warehouse workers. Employees within the UK factories have reported unbearable conditions where staff members have been sleeping in the toilets due to over-exhaustion, and ambulances being called to various warehouses once every two days to aid employees. Could these reports have an influence on Amazon’s share price?

A range of different factors, both against and in favour of Amazon, have left a slightly uncertain feeling heading into Q3, where profit is expected to come in lower than Q2 at $4.59c a share, as Amazon’s investment strategy continues. Amazon (NASDAQ: AMZN) releases Q3 results after US market close on Thursday 24 October.

Source: [1] https://www.technologyreview.com/s/614487/meet-americas-newest-military-giant-amazon/

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