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Amazon is set to report another jump in revenue when it reports first-quarter results on 20 April, but the company could again struggle to meet profit expectations amid stiff competition for its web services and rising costs for online retailing.
The internet retailing giant has consistently outperformed revenue expectations in recent quarters, but has also missed profitability expectations several times in the past and has been punished by investors for these misses.
Consensus earnings expectations proved to be too high when Amazon reported its fourth-quarter results, and reported earnings per share (EPS) came in 34% below market expectations. A number of analysts lowered their long-term price targets for the stock in the wake of the fourth-quarter release, but expectations are still quite high for the first quarter. Adjusted EPS is expected to come in at $1.618 and revenue is expected to grow to $27.953 billion, from $22.717 billion a year ago.
Investors are keenly focussed on slowing margin growth in the Amazon Web Services, its cloud computing services business that’s facing increased competition from the likes of Microsoft and Google, as well as rising costs in Amazon’s online retailing business.
Where are margins heading? Amazon has a wide global distribution and bills in US dollars so these are less subject to currency volatility, but its costs are denominated in the local currency. The strength of the dollar in 2014 and 2015 meant costs in local currency terms were lower, helping margins. But this trend has reversed in 2016, and that’s likely to weigh on margin growth in the first quarter.
Despite this, Amazon’s gross margin is expected to grow to 34 % in the first quarter, from 31.9% in the fourth quarter, which is asking a lot now that forex has become a headwind.