North America

Earnings Preview: Amazon Q2 2017 (AMZN)

By: Craig Bowles

Overview

Amazon.com (AMZN) is slated to report 2Q 2017 earnings after the close on Thursday, July 27th. Results are typically released between 4:01 and 4:10 p.m. ET. A conference call will follow at 5:30 p.m. ET which is webcast through Amazon Investor Relations. The world’s largest internet retailer is a component of the S&P 500 and NASDAQ 100 Indexes.

Outliers & Strategy

Amazon provided the following guidance for the 2Q 2017 period in the April (1Q) earnings release:

  • Net sales: The Company guided between $35.25 bln and $37.75 bln. Analysts expect an increase of 22.3% y/y to $37.18 bln. (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $36.84 bln three months ago.
  • The company also indicated operating income is expected to be between $425 mln and $1.075 bln.
  • Earnings Per Share (EPS): Amazon typically reports a “clean” figure that compares with consensus estimates. The Street estimate is for $1.42 (range $1.04 to $2.42). Consensus was $1.88 three months ago.

Forward guidance is a critical measure for Amazon and usually impacts the ensuing trading activity:

  • Revenues Guidance 3Q2017): Analyst consensus is for up 22.3% y/y to $37.18 bln (range $36.53 bln to $37.75 bln).
  • Operating Income (Loss) Guidance (3Q2017): Guidance has been conservative historically.
  • Shares can react negatively toward conventional measures such as Earnings Per Share and Revenues but the market tends to reverse if the operational metrics are stronger than forecasts.
  • Price/Book 22.7x compares to the 5-year average 17.1x; Price/Sales 3.5x compares to the 5-year average 2.2x; Price/Cash Flow 29.8x compares to the 5-year average 27.7x. (Price/Sales shows good value at up to 4.2x given expected revenue growth.) While much of the attention centers on Amazon’s retail operations, an overlooked part of its business are the hosted web services & cloud-computing segments that contribute meaningful revenue.
  • Analysts view Amazon with 42 Buy, 4 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 1,022,421 shares during the last three months and 2,122,716 shares over the past year. (source: NASDAQ.com)
  • Amazon shares have a 1-day average price change on earnings over the past eight quarters of 6.4%. Options are pricing in an implied move of 4.06% off earnings.

Recent News

  • 07/12: Amazon may have sold as much as $2.9 billion worth of goods during the 30 hours of its “Prime Day.” That’s up 60% from last year. Cowen & Co. notes “Prime adoption is the biggest driver of the retail business long-term,” according to a post on Barron’s.com.
  • 07/07: MKM Partners estimates that Amazon now has a 5% “market share” of all retail categories, excluding food. Whole Foods will put Amazon within an hour drive of 70% of Americans, according to a post on Barron’s.com.
  • 07/03: Amazon completed its $650 million purchase of privately-held Dubai-based Middle East online retailer Souq.com marking one of the biggest Middle East tech deals ever, according to a post on Barron’s.com.
  • 06/30: Leerink Partners suggests Amazon should have an interest in buying Rite Aid’s 2,350 remaining locations, according to a post on Barron’s.com.
  • 06/29: Oppenheimer believes Amazon’s $13.7 bln bid may undervalue Whole Foods Market, but it now appears less likely a new bid will come from a strategic player, according to a post on Barron’s.com.
  • 06/19: Wedbush laid out the case for a hypothetical Amazon/ Grubhub deal. With Grubhub under its belt, Amazon could become the dominant player in all aspects of food delivery, according to a post on Barron’s.com.

Technical Review

Amazon’s stock has been in an uptrend since November 2008 and the exponential growth of the stock prices since 2014 is a little unsettling. A third leg up similar to the first would take the stock to $1130. July’s $1,034.97 is another new all-time high as the stock attempts an upside breakout from a balance area. (Chart courtesy of StockCharts.com)

Summary

From books to possibly auto parts, Amazon continues to impress customers. The company’s pledge to add 100,000 new jobs in the U.S. over next 18 months is expected to help ward off political antitrust blowback. The worry is that various investments will cut into 2017 profitability. Analysts remain bullish. Insider selling picked up sharply the past three months but that could be seasonal given the annual sales were almost unchanged. Over the last four quarters, the company’s EPS has beaten and missed analyst consensus by an average of 38c. Estimize consensus for an EPS of $1.50 on revenue of $37.312 bln compares to analyst consensus for an EPS of $1.42 on revenue of $37.18 bln. Market participants will also focus on next quarter’s guidance. Amazon’s operating income guidance has shown improved downside over the past year and reports above the high end of guidance have coincided with positive market reactions. $1.075 bln is the high end for this quarter.

 

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