Earnings Preview: Amazon.com - Analyst Blog

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Amazon.com Inc. ( AMZN ) is scheduled to report its fourth quarter fiscal 2011 results today. We witness limited movements in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Amazon's third-quarter revenue growth was strong, but earnings missed the Zacks Consensus Estimate by 10 cents, impacted by higher expenses.

The company reported revenues of $10.88 billion, up 9.7% sequentially and 43.9% year over year (exceeding the mid-point of management's guided range). Key strategies for driving revenue growth in the last quarter were competitive pricing, free shipping, user experience on Amazon properties and the Amazon Prime program.

The gross margin shrunk 63 bps sequentially to 23.5%, but was more or less flat with the year-ago quarter. The sequential decrease was due to unfavorable mix. Extra costs related to new product launches also restricted margins.

Fourth Quarter Guidance

Amazon expects revenue to come in at around $16.45-18.65 billion (up 61.4% sequentially, or up 35.5% year over year at the mid-point), more or less in line with consensus expectations of around $18.1 billion. Operating income (including $200 million for stock based compensation) is expected to be approximately $200 to 250 million (down nearly 37% sequentially).

(Detailed earnings results can be viewed in the blog titled: Amazon Plunges After Weak Q3

Agreement of Analysts

Out of the 29 analysts providing estimates for the fourth quarter, 1 analyst made an upward revision, while 2 analysts made downward revisions in the last 30 days. Over the same period, 1 analyst made an upward revision while 3 made downward revisions for fiscal 2012, reflecting declining sentiments for the analysts.

The analysts are expecting fourth-quarter revenue to be above the Street Consensus Estimate of $18.20 billion, driven by accelerating eCommerce share gains, strong Kindle hardware sales and solid holiday season sales. Internet marketing research company comScore reported that retail e-commerce spending for the entire November-December 2011 holiday season was $37.2 billion (up 15% year over year).

On the other hand, some analysts have pointed to weak margins, given Amazon's continued expansion of data centers, price promotions/free shipping, and investments in new initiatives (cloud computing/video streaming). Additionally, the recent price cut on the Kindle e-reader and Kindle Fire's $199 price-point are likely to restrict margin expansion for quite some time. Hence, they believe that weak margins coupled with foreign currency headwinds will lead to poor earnings in the fourth quarter.

Magnitude of Estimate Revisions

The Zacks Consensus Estimate for the fourth quarter, slid a penny in the last 30 days and 3 cents in the last 90 days to 16 cents.

For fiscal 2011, the Zacks Consensus Estimate dropped by a penny in the last 30 days and 3 cents post third-quarter earnings to $1.15.

According to analysts, Amazon remains in an investment cycle across three primary fronts -- global distribution footprint (distribution centers), digital initiatives (Kindle, tablet and video content), and Amazon Web Services (AWS). They believe that the company's increased spending on fulfillment centers, heavy investments in technology infrastructure to support rapid growth in AWS and the digital business will lead to continued margin pressure. This could be the primary reason for the decrease in estimates.

However, longer term, the analysts believe that effective utilization of the company's distribution centers and the global expansion of AWS will lead to an improvement in its productivity, and consequently, expand its margins.

Recommendation

Amazon is one of the leading players in an extremely fast-growing market. We believe that Amazon's third-quarter momentum will likely continue in the fourth quarter given the stability in overall eCommerce market growth.

We believe that the strong sales of Amazon's Kindle tablet and e-reader devices will lead to better-than-expected fourth quarter revenue. The company's prime and increased product expansion will continue to boost revenue per user while facilitating the retention of customers. Following Kindle Fire, other new Kindles should help Amazon.com to successfully navigate through the accelerating transition to digital media from physical objects.

Further, Amazon is expected to benefit from the significant growth potential in domestic and more so in international e-commerce. However, the next phase of growth is dependent on Amazon's own capacity to serve customers, especially in international markets, where growth rates are likely to be higher. We expect Amazon to target international growth more aggressively, by starting operations in new regions around the world.

However, we note that technology investments continue to pressure margins, which would therefore impact its bottom line performance in the near term. However, over the long term, we expect strong results driven by continued share gains and the company's strong fundamentals.

Of course, competition from eBay Inc. ( EBAY ), Apple Inc. ( AAPL ) through its iBooks app, Barnes & Noble, Inc. ( BKS ) and Google Inc. ( GOOG ) remains as strong as ever.

Amazon shares currently carry a Zacks Rank of #3, which translates to a Hold recommendation in the short term (1-3 months).


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AAPL , AMZN , BKS , EBAY , GOOG

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