Amazon (AMZN) is set to release its third-quarter (Q3) earnings on Thursday, Oct. 31, after market close. Interestingly, despite Amazon’s presence in high-growth sectors, shares of this e-commerce and cloud computing giant haven’t moved much over the past three months, gaining a mere 0.7%.

Amazon’s cloud and advertising segments continue to perform well, which has helped maintain investor optimism. Furthermore, the company’s ongoing advancements in artificial intelligence (AI) offer a strong foundation for future growth, positioning Amazon as a long-term winner in the tech space.

However, it hasn’t been all smooth sailing. In Q2, Amazon’s revenue fell short of Wall Street’s estimates, missing the target of $148.56 billion. Additionally, the company’s Q3 sales forecast also came in below expectations, which has kept the stock relatively stagnant. Adding to the pressure, macroeconomic challenges are weighing on Amazon's core retail business, which is the largest revenue generator for the company.

Looking ahead, will the growth in its cloud and advertising business be enough to offset challenges in its retail operations? With earnings just around the corner, let’s see what analysts recommend for Amazon stock.

Amazon’s Cloud Segment to Sustain Momentum

Amazon’s cloud computing platform, Amazon Web Services (AWS), continues to show strong growth. The segment reported revenue of $26.3 billion in Q2, an 18.8% increase year-over-year. What’s noteworthy is that AWS's growth has been accelerating for three consecutive quarters, climbing from 12% in Q3 of 2023, to 13% in Q4, and 17.2% in Q1 of 2024.

AWS is seeing significant demand for both generative and non-generative AI workloads as more enterprises shift to cloud solutions and move away from on-premises infrastructure.

As AI is rapidly becoming integral to modern business operations, AWS is leveraging this trend to its advantage. Its AI services, already generating billions in revenue, are further strengthened by a strategic partnership with Nvidia (NVDA). In addition, AWS's custom silicon chips, Trainium and Inferentia, are highly sought after for AI tasks, boosting the platform's appeal. The upcoming release of the second version of Trainium promises enhanced performance and better pricing, which is expected to fuel further growth.

AWS’s rapid innovation, especially in generative AI and machine learning, positions it well to consistently deliver solid growth. The company plans to make significant investments in AWS infrastructure to meet the growing demand for AI workloads. Additionally, a focus on operational efficiency is expected to support AWS’s margins, ensuring the segment remains a key contributor to Amazon’s long-term growth.

Amazon’s Booming Ad Business

Amazon’s advertising business is skyrocketing, showing impressive growth with more than 20% year-over-year gains for several quarters. In Q2 alone, Amazon added a substantial $2 billion to its advertising revenue, bringing the total to over $50 billion in the past 12 months.

This momentum is likely to continue in Q3, as well. Notably, a significant portion of this revenue comes from sponsored ads, which have proven to be a lucrative source for the company. Looking ahead, Amazon sees even more potential in this area, especially in video advertising, a segment that is expected to grow significantly.

By leveraging advanced advertising technology and enhanced measurement tools, Amazon is improving ad relevance for users. This not only boosts the effectiveness of the ads, but also sets the stage for continued revenue growth in the future.

With its advertising segment now a key contributor to overall sales and profitability, Amazon is positioning itself as a formidable player in the digital ad space.

Navigating Retail Challenges

Macroeconomic headwinds are affecting consumer spending, which in turn is affecting Amazon’s retail business, which includes its e-commerce platform. Nonetheless, Amazon's e-commerce business has shown resilience, and the segment has delivered steady growth as Amazon expanded its product offerings, focused on value pricing, and improved delivery speeds.

To enhance efficiency, Amazon is regionalizing its inbound network and expanding its same-day delivery capabilities, which reduces delivery distances and lowers costs. Additionally, its focus on automation and robotics is expected to further enhance delivery speed and lower costs, boosting overall efficiency.

The Bottom Line on AMZN Stock

While Amazon is grappling with economic challenges, its strengths in cloud and advertising revenues, coupled with the resilience of its stores business, are likely to cushion its Q3 earnings. Analysts anticipate earnings of $1.14 per share in Q3, reflecting a 21% year-over-year increase.

Wall Street remains bullish on Amazon stock ahead of the earnings report, reflected in a “Strong Buy” consensus rating. 

The average price target of $225.98 suggests a potential upside of 20.4% from current levels, making Amazon stock a compelling investment option for investors ahead of the Q3 earnings release. 

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