By: Craig Bowles
Amazon.com (AMZN) is slated to report 2Q 2018 earnings after the close on Thursday, July 26th. Results are typically released by 4:02 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 2018 period in the April (1Q) earnings release:
- Net sales: The Company guided between $51.0 bln and $54.0 bln. Analysts expect an increase of 40.6% y/y to $53.38 bln. (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $52.21 bln three months ago.
- The company also indicated operating income is expected to be between $1.1 bln and $1.9 bln. (Above the guidance range has coincided with sharp increases in the stock price.)
- Earnings Per Share (EPS): Amazon typically reports a “clean” figure that compares with consensus estimates. The Street estimate is for $2.50 (range $1.53 to $3.09). Consensus was $1.43 three months ago.
Forward guidance is a critical measure for Amazon and usually impacts the ensuing trading activity:
- Revenues Guidance 3Q2018): Analyst consensus is for up 32.7% y/y to $58.03 bln (range $56.18 bln to $59.77 bln).
- Operating Income (Loss) Guidance (3Q2018): 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 28.0x compares to the 5-year average 18.8x; Price/Sales 4.6x compares to the 5-year average 2.5x; Price/Cash Flow 49.1x compares to the 5-year average 27.7x. (Price/Sales still shows good value at up to 4.5x even using the slower expected 2019 revenue growth. While much of the attention centers on Amazon’s retail operations, an overlooked part of its business is the hosted web services & cloud-computing segments that contribute meaningful revenue.
- Analysts view Amazon with 49 Buy, 2 Hold, and 0 Sell ratings. (source: MarketBeat.com)
- Insiders sold 15,362 shares during the last three months and 1,086,321 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 4.05%. Options are pricing in an implied move of 4.19% off earnings.
- 7/19: P. Morgan reiterated an Overweight rating on Amazon and calls it a “top pick.” Sees upside potential to consensus 2Q/3Q revenue estimates and cited the successful Prime Day sales holiday that was probably ahead of expectations, according to a post on CNBC.com.
- 7/18: PiperJaffray reiterated an Overweight rating on Amazon. Analysis of Google search trends suggests online retail revenue for Q2 is tracking in-line to perhaps slightly below consensus but Amazon Web Services and advertising could still drive higher-than-expected performance for the quarter, according to a post on Barron’s.com.
- 7/05: Amazon is planning to publish a holiday toy catalog that would be mailed to millions of U.S. households and distributed at Whole Foods locations, according to a post on CNBC.com.
- 7/05: Amazon’s growing advertising business is poised to challenge the stranglehold Google and Facebook have on the internet’s ad dollars, according to a post on nbcnews.com.
- 7/03: Amazon is offering extra deals at Whole Foods as Prime Day invades stores for the first time, according to a post on Businessinsider.com.
- 6/29: Loop Capital views Amazon’s purchase of PillPack as not necessarily a “game changer,” but the most significant benefit is the target’s 50 U.S. state licenses, according to a post on Zerohedge.com.
- 6/28: A new program allows contractors around the country to launch businesses that deliver Amazon packages, according to a post on AP.com.
From a value perspective, Amazon stock is finally no longer such a bargain relative to revenue growth given 2019 expectations for slowing. So, value investors probably are hoping momentum investors drive the stock higher from here. With all the negative news around tax collections and postal rate increases, you almost forget the ongoing incredible cloud services growth and the anticipation of cashier-less stores in their 460 Whole Foods locations. The effect of previous price hikes on Prime subscribers should be watched closely this year but appears to have been already forgotten in the media. Analysts remain bullish. Insider selling slowed even further the last three months. Over the last four quarters, the company’s EPS has beaten and missed analyst consensus by an average of 96c. Estimize consensus for an EPS of $2.68 on revenue of $53.948 bln compares to analyst consensus for an EPS of $2.50 on revenue of $53.38 bln. Amazon’s operating income guidance has shown less downside risk in recent quarters and reports above the high end of guidance have coincided with positive market reactions. $1.9 bln is the high end for this quarter. Market participants will also focus on next quarter’s guidance while keeping in mind that it tends to be conservative.
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