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Amazon Q3 Earnings Preview: Here's What Investors Should Know

E-commerce giant Amazon (NASDAQ: AMZN) is scheduled to report third-quarter earnings on Oct. 28. As the crucial holiday shopping season approaches, investors will want reassurance from Amazon that it has robust plans to fulfill increasing customer demand. Equally as important will be how increasing fulfillment prices will affect the bottom line at Amazon.

Since the onset of the coronavirus pandemic, Amazon has benefited from a surge of new customers and increased orders from existing customers. But the company has also been working to deal with the strain on its system that this boost has caused. This latest report should offer an update on how well Amazon is managing.

Let's discuss what else might be revealed when Amazon reports earnings on Thursday.

Amazon's stock is down 9% in the last three months. Image source: Getty Images.

Amazon is spending to keep up with demand

The coronavirus pandemic continues to cause disruptions in supply chains worldwide. An outbreak at one seaport can create domino effects that cause bottlenecks in several regions. Early on, Amazon was actually forced to prioritize essential items in order to manage. Even as economies are reopening and more consumer shopping is shifting back to in-person, the company is still facing challenges in its efforts to fulfill customer demand.

Management has guided investors to look for year-over-year revenue growth between 10% and 16% in Q3. Meanwhile, its guided range for operating income of $2.5 billion to $6.0 billion, suggests a drop from last year's operating income of $6.2 billion in the same quarter. That drop is likely the result of increased costs of operation.

Since the pandemic onset, Amazon has been spending aggressively on hiring staff and expanding fulfillment center capacity. Total employment at Amazon grew from 867,000 in the second quarter of last year to 1.34 million in Q2 this year. What's more, to attract and retain employees, the company has rolled out a slew of incentives, including increased wages, bonuses, and free college tuition.

Economies worldwide are experiencing labor shortages, which is understandable. Not many folks are willing to work at the same wages while their on-the-job risks have elevated with COVID-19 still in circulation. To compensate for the added risks, employees are demanding higher wages, something not all companies are willing to provide. To Amazon's credit, it has been ready and willing to offer higher wages to help maintain its customers' positive shopping experiences.

Rising costs keep Amazon's stock grounded

Analysts on Wall Street expect Amazon to report third-quarter revenue of $111.6 billion and earnings per share of $8.93. The revenue estimate, if met, would be an increase of 16.1% from the same quarter last year and higher than the upper end of management's forecast. The EPS estimate would be far below last year's figure of $12.37, as the increased spending on fulfillment hits the bottom line.

Amazon's stock price is down 10.3% in the last three months and it's up about 1.9% year to date. The company experienced a boom in spending and profits in fiscal 2020 as the initial effects of the pandemic were a tailwind to the business. Now, as economies reopen and rising costs flow through, the pandemic has become a headwind.

Investors should keep a close eye on how these headwinds affect Amazon. They should also take note of management's estimations on how long it is expected to persist. Fourth-quarter guidance will likely be as crucial as third-quarter results in determining the market's reaction to Amazon's earnings release.

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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. Parkev Tatevosian owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.


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