Amazon margins are earnings key as tech needs more good news

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Credit: Jeenah Moon/Bloomberg

The worst month in nearly a decade for tech stocks has investors paying extra attention to Amazon's third-quarter earnings report on Thursday.

Amazon is the second-best performing megacap tech stock this year, with a 48 percent gain that trails only Netflix. While the web retailing giant is expected to say that revenue grew 30 percent from the year-earlier period, Wall Street is more focused on the profitability of key businesses including cloud computing, advertising and third-party retailing.

"The highest-margin businesses are simply growing so fast that Amazon is either not able or not willing to reinvest enough to offset the margin expansion," Macquarie analyst Benjamin Schachter wrote in a research note.

After outperforming for most of the year, technology stocks have been hammered amid a resurgence of market volatility in October. A basket that tracks shares of Facebook, Amazon, Netflix and Google parent Alphabet, has tumbled 12 percent in October, the worst month since at least 2012. Alphabet also reports earnings on Thursday after the markets close.

Wall Street is projecting Amazon Web Services revenue of about $6.7 billion in the third quarter, based on the average of four analyst estimates compiled by Bloomberg. That's up 45 percent from the same period a year ago.

Strength in web services and advertising essentially puts Amazon "in a unique position to be as profitable as it chooses," Wedbush analyst Michael Pachter wrote in a research note. He said Amazon's operating income, which excludes depreciation and amortization, could exceed analyst estimates and come in at the high end of the company's forecast of $1.4 billion to $2.4 billion. Analysts surveyed by Bloomberg expect $2.13 billion, on average.

Amazon briefly exceeded a market valuation of $1 trillion last month but has since fallen more than 15 percent. Goldman Sachs sees "meaningful potential" for the shares to continue to outperform as the company generates returns on cash invested at a rate that exceeds peers and other sectors, analyst Heath Terry wrote.

--Bloomberg News

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