Q3 results preview: Amazon's bold spending to be closely watched

Wall Street has often overlooked the company's relatively small profits as CEO Jeff Bezos chases growth

Amazon.com Inc's audacious spending on original TV shows and movies, its cloud business and an ever-expanding core retail operations, will be closely watched by investors when the retail giant reports results on Thursday.

Wall Street has often overlooked the company's relatively small profits as Chief Executive Jeff Bezos chases growth.

Bezos has looked to cement the company's position as a leader in cloud services, become a formidable foe of Netflix Inc, and disrupt the retail industry with its recent purchase of premium grocer Whole Foods.

This quarter, however, investors will want to see if Amazon's operating income is being pressured as it cuts prices to fight competition from Wal-Mart Stores Inc, which is investing heavily in its own online business.

"The open question for the fourth quarter is whether they will have to compete on price because Wal-Mart is making such a push into online," Wedbush Securities analyst Michael Pachter said in a preview note.

"If their guidance for operating profit is substantially below a year ago, then that's a signal that they intend to compete on price."

Amazon closed its $13.7 billion Whole Foods buy on Aug. 28 and immediately slashed prices of some products at the grocer.

Analysts say the price cuts and investments in other sectors, from cloud computing to video, are likely to raise the company's costs and reduce third-quarter operating income.

Amazon has given a wide forecast range - between operating income of $300 million and an operating loss of $400 million.

Analysts on average are expecting $144.6 million, according to data and analytics firm FactSet.

The company said in July it expected third-quarter revenue of $39.25 billion to $41.75 billion. Analysts expect revenue to rise 29 percent $42.14 billion, according to Thomson Reuters.

Amazon's shares were up 0.6 percent in early trading on Thursday. They have dropped 7 percent since the company reported second-quarter results on July 27.

Investors acknowledge that Amazon's ambitions to disrupt multiple industries requires constant spending, and lower margins may not be a big concern, Barclays analysts said in their preview note.

The company's operating costs jumped 29 percent to $32.14 billion in the third quarter of 2016.

Shareholders will also be closely watching Amazon's holiday-quarter forecast, he said, adding that the company might forecast disappointing fourth-quarter operating income.

Amazon reported operating income of $1.11 billion in the fourth quarter of 2016.

The high level of spending is not going to slow this year either, analysts said.

Video will remain an area where Amazon spends heavily as original shows help it gain and retain subscribers. Rival Netflix Inc commands the online-streaming market by spending billions on original shows.

"The beauty of Amazon versus Netflix is that Amazon can monetize its video content through retail, Netflix, unfortunately, doesn't have that luxury," said Benchmark Co analyst Daniel Kurnos.