Don't Overlook These Key Areas When Amazon Reports Earnings
By Daniel Sparks | October 25, 2018 |

The stakes are high for Amazon (NASDAQ:AMZN) when it reports third-quarter results this week. After the company crushed expectations with 39% year-over-year revenue growth and more than a tenfold increase in earnings per share for its second quarter, investors will be looking for more strong growth in Q3.

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While traditional metrics like the revenue, operating income, EPS, and guidance will be worth checking in on, investors should be careful not to overlook three of the fastest-growing areas of Amazon's business: Amazon Web Services (AWS), subscription services, and advertising.

Amazon Web Services
Amazon's cloud-computing business, AWS, saw revenue jump 49% year over year in Q2. This crushed the company's online store (Amazon's biggest business segment) sales growth of 16% during the same time frame. AWS' revenue growth also came in ahead of Amazon's 39% year-over-year increase in third-party seller services revenue.

Highlighting how significant AWS' momentum is, this was the segment's third quarter in a row of accelerating growth.

AWS is no small portion of Amazon's business. In Q2, it accounted for 12% and 55% of consolidated net sales and operating income, respectively.

Subscription Services
Another key area to watch is Amazon's subscription services revenue, which increased an impressive 57% year over year in Q2. Including Amazon Prime membership fees and revenue from audiobook, e-book, digital video, digital music, and other non-AWS subscription services, this segment captures the strong growth from services like Amazon Music, Kindle Unlimited, and Audible.

Subscription services revenue accounted for 6% of the company's second-quarter revenue.

Advertising
Finally, there's Amazon's advertising business. Though it is a small portion of its overall business, it's growing by leaps and bounds.

If you're looking for a breakdown of Amazon's advertising business on its financial statement, you won't find it. Advertising revenue is buried in the company's "other" segment, which accounts for 4% of revenue. But a footnote in Amazon's earnings releases importantly notes that the segment "primarily includes sales of advertising services, as well as sales related to our other service offerings." Therefore, with other revenue up 129% year over year in Q2 (64% when adjusted to exclude a $640 million increase to the segment's revenue due to a change in the way Amazon recognizes its revenue), you can bet Amazon's advertising business is growing fast.

Of course, Amazon isn't keeping the success of its advertising business entirely under wraps. Amazon CFO Brian Olsavsky gave investors a 10,000-foot view of the business in the company's second-quarter earnings call. "[Advertising is] now a multibillion-dollar business for us," he said. "We're seeing strong adoption across a number of fronts." The CFO went on to note that Amazon now has "hundreds of thousands of emerging and established advertisers."

Investors should look for all three of these important catalysts to continue delivering strong growth in Q3.

Amazon reports its third-quarter results after market close on Thursday, Oct. 25.

This article originally appeared on The Motley Fool.

 

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