Earnings Preview: Amazon.com - Analyst Blog

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Amazon.com Inc. ( AMZN ) is scheduled to report its first quarter fiscal 2012 results on April 26, 2012. We witness both downward and upward movements in analyst estimates in the build-up to the release.

Prior-Quarter Synopsis

Amazon reported weak fourth-quarter revenue, but earnings beat the Zacks Consensus Estimate by 24 cents, or 150%, on improved operating margins and a lower share count.

The company reported revenues of $17.43 billion, up 60.3% sequentially and 34.6% year over year (in the middle of management's guided range but missing Consensus expectations by around 4.3%). Key strategies for driving revenue growth were competitive pricing, free shipping, user experience on Amazon properties and the Amazon Prime program.

The gross margin shrunk 280 bps sequentially to 20.7%, but was up 34 bps from the year-ago quarter. The sequential decrease was due to unfavorable mix. The extra costs related to new product launches also restricted margins.

First Quarter Guidance

Amazon expects revenue to come in at around $12.0-$13.4 billion (up 27.1% sequentially, and 28.8% year over year at the mid-point), below Consensus expectations of around $13.4 billion. Operating income (including $200 million for stock-based compensation and amortization of intangible assets) is expected to come in at approximately ($200) to $100 million.

Detailed earnings results can be viewed in the blog titled: Revenue Miss Sends Amazon Crashing

Agreement of Analysts

One out of the 29 analysts providing estimates for the first quarter 2012 decreased the estimate, while one moved in the opposite direction in the last 30 days. Over the same period, 2 analysts made downward revisions for fiscal 2012.

The analysts expect first-quarter revenue to be slightly above the Street Consensus Estimate of $12.9 billion, driven by accelerating eCommerce share gains, increase in users and improved product selection.

According to the market research firm NPD Group, video game software sales were down 28% in the March quarter. As 2-4% of Amazon's overall business is video games, a few analysts believe that this presents a modest headwind to Amazon's media business that likely will not be fully offset by the Kindle and Kindle Fire sales.

Additionally, the analysts contend that the majority of customers are adopting the Amazon Prime program that provides free two-day shipping and also free access to Amazon's streaming media services, which will increase the shipping losses going forward.

A few analysts expect gross margins to expand in the first quarter driven by a favorable mix of business, with strong growth of 3P and AWS, but expect operating margins to compress due to higher operating expenses.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate for the first quarter remained unchanged at 7 cents, but fell 3 cents to $1.36 for fiscal 2012.

Over the past 90-day period, the Zacks Consensus Estimate witnessed a significant decline of 32 cents for the first quarter and 55 cents for fiscal 2012.

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, along with heavy investments in technology infrastructure to support rapid growth in AWS and the digital business will lead to continued margin pressure, impacting profitability. This could be the primary reason for the expected 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.

Recommendation

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

We believe the mass adoption of lower-priced Kindle and e-reader devices will lead to decent first quarter revenues. The company's prime and increased product expansion will continue to boost revenue per user while facilitating customer retention.

Further, Amazon is expected to benefit from significant growth potential in domestic and even moreso 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 operating margins and therefore, margins are anticipated to be weak in the near term. However, over the long term, we expect strong results driven by continued share gains and the company's strong top-line 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 for 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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