North America

Earnings Preview: Amazon Q3 2017 (AMZN)

By: Craig Bowles

Overview

Amazon.com (AMZN) is slated to report 3Q 2017 earnings after the close on Thursday, October 26th. 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 3Q 2017 period in the July (2Q) earnings release:

  • Net sales: The Company guided between $39.25 bln and $41.75 bln. Analysts expect an increase of 28.6% y/y to $42.05 bln. (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $37.18 bln three months ago.
  • The company also indicated operating income is expected to be between $(400) mln and $300 mln.
  • Earnings Per Share (EPS): Amazon typically reports a “clean” figure that compares with consensus estimates. The Street estimate is for $0.03 (range $(0.33) to $0.26). Consensus was $1.10 three months ago.

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

  • Revenues Guidance 4Q2017): Analyst consensus is for up 34.6% y/y to $58.85 bln (range $56.10 bln to $60.55 bln).
  • Operating Income (Loss) Guidance (4Q2017): 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 20.6x compares to the 5-year average 17.1x; Price/Sales 3.2x compares to the 5-year average 2.2x; Price/Cash Flow 28.6x compares to the 5-year average 27.7x. (Price/Sales shows good value at up to 5.5x 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 47 (42 last qtr) Buy, 2 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 13,599 shares during the last three months and 1,090,702 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 4.51%. Options are pricing in an implied move of 4.90% off earnings.

Recent News

  • 10/13: Amazon is planning to start making its own athletic apparel, according to a post on Bloomberg.com.
  • 10/12 Atlantic Equities reaffirmed an Overweight rating on Amazon while predicting its ad sales will nearly quintuple during the next four years, according to a post on CNBC.com.
  • 10/12: New data from Strategy Analytics suggests that Amazon’s Alexa smart assistant is beating Google in the home. Strategy Analytics found that Amazon Alexa will be on 68 percent of all smart speakers by the end of the fourth quarter of 2017, according to a post on CNBC.com.
  • 10/11: Credit Suisse: “While most of the headlines around the Whole Foods acquisition have been about price cuts, we believe the real path for Amazon to create lasting shareholder value is through fulfillment and delivery via Prime Now,” according to a post on Reuter’s.com.
  • 10/06: Amazon will decide before Thanksgiving whether to move into selling prescription drugs online, according to a post on Reuter’s.com.
  • 10/06: Amazon is testing a delivery service called Seller Flex that picks up packages from third-party sellers on Amazon’s web site and delivers them to consumers, according to a post on Barron’s.com.
  • 09/12: Amazon’s price cuts boosted Whole Foods foot traffic by 25%, according to a post on Fortune.com.

Summary

Goldman Sachs has questioned whether tech stock investors have overlooked the risks associated with potential government regulatory issues. Certainly, that is a worry for Amazon CEO Bezos’ modus operandi of change which embraces Type 2 (reversible) decisions while cautious of Type 1 (irreversible) decisions. Analysts remain bullish. Insider selling almost evaporated over the past three months. Over the last four quarters, the company’s EPS has beaten and missed analyst consensus by an average of 47c. Estimize consensus for an EPS of $0.17 on revenue of $41.969 bln compares to analyst consensus for an EPS of $0.03 on revenue of $42.05 bln. Amazon’s operating income guidance lowered Q3 expectations but reports above the high end of guidance have coincided with positive market reactions. $300 mln is the high end for this quarter. Market participants will also focus on next quarter’s guidance.

 

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