Amazon.com’s earnings machine might be taking a breather. For how long is the $2 trillion question.
The e-commerce giant’s market cap has stayed mostly below that level since its last earnings report two months ago. That report contained a disappointing operating income forecast for the just-ended quarter. That itself isn’t unusual; Amazon is typically conservative with this projection, which has come in below Wall Street’s expectations for 16 of its past 20 quarterly reports, according to data from FactSet.
But the company’s revenue growth in the second quarter also fell short, and tech investors in general have grown more concerned about blowout capital spending on artificial intelligence by Amazon and its big tech rivals. Amazon’s earnings power is of particular import, given the company’s historically thin-margin retail business, which has been beefed up over the past few years by its other ventures—such as cloud computing and advertising. Amazon averaged an annual operating margin of 2.6% between the years 2010 and 2019; its operating margin for the 12-month period ended in June was 9%.
Wall Street has been expecting that journey to continue unabated. Amazon’s operating income is expected to surge 69% this year and average 24% annual growth over the next three years—vastly outpacing the 11% revenue growth the company is expected to average over the same time, according to consensus estimates from FactSet.
But that might be a challenge, given Amazon’s expanding ambitions. Most notable among those is Project Kuiper—a low-orbit satellite network designed to provide broadband internet connections to underserved parts of the globe. Amazon announced plans in early 2022 to launch up to 83 satellites over a five-year stretch. Two prototypes are already in orbit, while production satellites will start launching in early 2025.
Kuiper is a program near and dear to the heart of Amazon’s now-spacefaring founder, Jeff Bezos. It is also far from a sure thing, particularly given the lead of Elon Musk’s Starlink service, which recently sent up its 7,000th satellite. Bezos used his last shareholder meeting as chief executive in 2021 to drive that point home. He said: “Can I stand here and tell you that our $10 billion investment in Kuiper will generate returns on invested capital? I can’t. I believe it will, and we’re working hard to ensure that’s the case.”
Satellites require a lot of upfront investment before turning a dime in profit. Several analysts believe Wall Street’s near-term earnings estimates for Amazon aren’t fully taking that into account. In a recent report, Brian Nowak of Morgan Stanley cited “tactical risk” to Wall Street’s targets for Amazon’s fourth-quarter operating earnings in part owing to Kuiper investments. In his own note, James Lee of Mizuho said Wall Street’s targets for Amazon’s North American segment operating income in 2025 could face “downward revisions” of 6% because of the project’s costs.
Both analysts are still positive on Amazon, rating the stock as a buy. But Ken Gawrelski of Wells Fargo went further on Monday, downgrading Amazon to a neutral rating. “In our view, Kuiper is likely to put a cap on margin expansion in the near term,” he wrote in his note, adding that other factors such as more competition for third-party sellers by Walmart could weigh on bottom-line growth. Amazon, Gawrelski wrote, “remains a margin expansion story, just likely a more moderate margin expansion pace than the market expects.”
Nowak of Morgan Stanley sees near-term risk in Amazon’s focus on expanding its share of “everyday essentials” sales, referring to such items as nonperishable foods as well as health, beauty and personal-care products. Such items typically command low profit margins, though Nowak added that capturing more sales in this market “is critical to driving more durable long-term top-line growth.” He expects Amazon to project fourth-quarter operating earnings as much as $1.5 billion below Wall Street’s current targets.
Amazon is in the midst of internal changes that might improve its cost structure. In a memo to employees last month, Chief Executive Andy Jassy announced a plan to boost each manager’s number of direct reports by at least 15% by the end of March. Some on Wall Street saw this as a stealth layoff announcement, since the move will likely thin out the management ranks of a company now boasting a workforce of more than 1.5 million. Jassy used the same memo to require employees to return to working in the office five days a week, which could effectively push out some who prefer to stay remote. Amazon might find launching a fleet of expensive satellites to be its easiest task at hand.
Write to Dan Gallagher at dan.gallagher@wsj.com