Amazon.com Inc.
(
AMZN
) is scheduled to report its second quarter fiscal 2012 results on
July 26. We witness downward movements in analyst estimates in the
build-up to the release.
Prior-Quarter Synopsis
Amazon reported weak first-quarter revenue, but earnings quadrupled
the Zacks Consensus Estimate of 7 cents per share on improved
margins and a lower share count.
The company reported revenues of $13.19 billion, down 24.4%
sequentially and up 33.8% year over year (at the high end of
management's guided range and around 2.2% above consensus
expectations). Key strategies for driving revenue growth were
competitive pricing, free shipping, user experience on Amazon
properties and the Amazon Prime program.
The gross margin expanded 114 bps year over year and 329 bps
sequentially to 24.0%. The sequential increase was due to lower
hardware costs and a favorable mix.
Second Quarter Guidance
Amazon expects revenue to come in at around $11.9-$13.3 billion
(down 4.4% sequentially, or up 27.1% year over year at the
mid-point), below consensus expectations of around $12.8 billion.
Operating income (including $260 million for stock-based
compensation and amortization of intangible assets) is expected to
come in at approximately ($260) to $40 million.
Detailed earnings results can be viewed in the blog titled:
Amazon Soars on Solid Q1 Results
Agreement of Analysts
Out of the 30 analysts providing estimates, 2 decreased their
estimates for the second quarter as well as for fiscal 2012 in the
last 30 days.
The analysts expect second-quarter revenue to be in line with the
Street Consensus Estimate of $12.9 billion. They also expect gross
margin numbers to improve in the upcoming quarter due to a
favorable mix of business, with strong growth of 3P and AWS,
offsetting the effect of other incremental costs.
GAAP EPS is expected to be materially ahead of the consensus
estimate of 13 cents, primarily driven by gross margin expansion
and accelerating eCommerce share gains.
However, a few analysts remain concerned about FX volatility and
weak macro conditions in Europe. They believe that strong eCommerce
trends in the U.S. will likely be offset by macro weakness in
Europe, pushing results below the consensus estimates.
Magnitude of Estimate Revisions
In the past 30 days, the Zacks Consensus Estimate remained
unchanged at 1 cent and $1.21 for the second quarter and fiscal
2012, respectively.
Over the last 90 days, the Zacks Consensus Estimate witnessed a
significant decline of 19 cents for the second quarter and 15 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 lowering of 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 that Amazon's first-quarter momentum will likely
continue in the second quarter given the consistent growth in the
overall eCommerce market. We also believe the company's Prime
platform and expansion of product categories will continue to boost
revenue per user while facilitating customer retention.
The Kindle platform will likely remain a major growth platform for
Amazon this year. The company's next-generation Kindle Fire is
expected to be thinner and lighter, and feature a built-in camera.
It will also have a display resolution of 1,280 x 800 pixels, about
the same as iPad 2. We think that this could be a good strategy to
compete against
Apple Inc.'s
(
AAPL
) iPad and
Google Inc.
(
GOOG
) Nexus 7. According to sources, the device is expected to be
shipped before September.
Given that there is significant growth potential in domestic and
more so in international ecommerce, Amazon may be expected to
benefit. However, the next phase of growth is dependent on its own
capacity to serve customers, especially in international markets,
where growth rates are likely to be higher and its own facilities
fewer.
As a result, both fulfillment and technology investments will
likely continue to grow. We expect Amazon to target international
growth more aggressively, by starting operations in new regions
around the world.
Therefore, despite its longer-term growth potential based on
continued share gains, we think that these technology investments
are pushing out the investment cycle. Therefore, we do not see any
alleviation of margin pressure any time in the near term. .
Additionally, competition from
eBay Inc
. (
EBAY
), Apple through its iBooks app,
Barnes & Noble, Inc.
(
BKS
) and Google 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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