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Can AWS Aid Amazon's (AMZN) Q3 Earnings Despite Competition?

Zacks Equity Research

Amazon AMZN is set to report third-quarter 2019 results on Oct 24.

The cloud computing division, Amazon Web Services (AWS), is dominating the cloud market on growing adoption and popularity. This trend is anticipated to get reflected in the third-quarter performance.

We note that solid momentum across AWS has been aiding Amazon in generating higher margins from its cloud business compared with the traditional retail business.

Notably, AWS revenues came in at $8.38 billion, accounting for 13.2% of the net sales in the last reported quarter and surged 37.3% year over year. We further note that AWS operating income improved 29.2% from the year-ago quarter to $2.12 billion, a trend that is likely to have continued in the third quarter.

Notably, all the abovementioned factors are anticipated to have contributed to the top line of AWS in the third quarter.

The Zacks Consensus Estimate for third-quarter 2019 AWS net sales is projected at $9.12 billion, indicating an improvement of 99.1% from the year-ago reported figure.

However, Amazon has been facing stiff competition in the cloud computing space from the likes of Microsoft MSFT, Alphabet’s GOOGL Google, International Business Machines and Alibaba BABA among others, which is anticipated to get reflected in the third-quarter results.

Click here to know how the company’s overall third-quarter performance is likely to be.

AWS Dominates, Rising Cloud Competition

Per the Synergy Research report, AWS maintained its leading position with 33% share in the cloud market in the last reported quarter.

However, growing momentum of Microsoft Azure, Google Cloud, IBM Cloud and Alibaba Cloud in the market cannot be ignored.

Moreover, these competitors especially Microsoft Azure and Google Cloud are leaving no stone unturned to increase their market share and reduce the gap with AWS.

Nevertheless, AWS’ persistent efforts toward expansion of its product and services portfolio are likely to have helped it in sustaining momentum in this highly competitive scenario in the to-be-reported quarter.

Further, its robust data center network is expected to have contributed to the third-quarter performance. Additionally, AWS offers strong discounts for long-term deals and advance payments to customers. This is anticipated to have expanded customer reach in the quarter under review.

Amazon.com, Inc. Revenue (TTM)

Amazon.com, Inc. Revenue (TTM)

Amazon.com, Inc. revenue-ttm | Amazon.com, Inc. Quote

Portfolio Strength Aiding Clientele Growth

During the third quarter, AWS was selected by The Globe and Mail as the preferred cloud provider. Notably, the latter leverages AWS to run its popular recommendation engine and proprietary Sophi predictive analytics platform.

Moreover, The Globe and Mail’s reporters and editors have been utilizing Amazon SageMaker, Amazon Comprehend, Amazon Rekognition, and Amazon Textract.

Further, AWS added another customer namely Pro Football Focus. Notably, the latter selected AWS as its official cloud and ML provider and has transitioned its entire infrastructure to AWS.

Hence, the company has witnessed expanding customer base during the quarter under review, which can be attributed to portfolio strength. We note that AWS announced general availability of Amazon Quantum Ledger Database, AWS IQ and Amazon EC2 G4 instances to name a few.

Strengthening services portfolio and clientele are likely to have contributed to the net sales of AWS in the third quarter.

Currently, Amazon carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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