North America

Earnings Preview: Amazon Q3 2018 (AMZN)

By: Craig Bowles

Overview

Amazon.com (AMZN) is slated to report 3Q 2018 earnings after the close on Thursday, October 25th. 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 3Q 2018 period in the July (2Q) earnings release:

  • Net sales: The Company guided between $54.0 bln and $57.5 bln. Analysts expect an increase of 30.6% y/y to $57.12 bln. (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $58.03 bln three months ago.
  • The company also indicated operating income is expected to be between $1.4 bln and $2.4 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 $3.12 (range $2.25 to $4.40). Consensus was $1.77 three months ago.

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

  • Revenues Guidance 4Q2018): Analyst consensus is for up 22.3% y/y to $73.93 bln (range $71.70 bln to $77.82 bln).
  • Operating Income (Loss) Guidance (4Q2018): 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 24.6x compares to the 5-year average 18.8x; Price/Sales 4.2x compares to the 5-year average 2.5x; Price/Cash Flow 40.1x compares to the 5-year average 27.7x. (Price/Sales shows good value if 4.5x or below relative to growth 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 48 Buy, 1 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 36,333 shares during the last three months and 1,109,055 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 4.01%. Options are pricing in an implied move of 7.25% off earnings.

Recent News

  • 10/12: Stifel Nicolaus added Amazon to its “Select List” following a pullback in many technology shares, according to a post on Barron’s.com.
  • 10/03: Amazon is raising minimum wage to $15 for hourly employees in the United States and United Kingdom and doing away with employee incentive pay including monthly bonuses, as well as stock option awards, according to a post on fortune.com.
  • 9/12: Amazon expands Whole Foods delivery to 10 more cities (now in 38 cities), according to a post on Techcrunch.com.
  • 9/08: Whole Foods workers want to unionize before they are displaced, according to a post on qz.com.
  • 9/08: Morgan Stanley believes cloud usage will more than double in the next two years benefitting companies such as Amazon, according to a post on Businessinsider.com.
  • 9/07: Amazon’s cashier-free Go store is coming to NYC (Chicago also), according to a post on Techcrunch.com.
  • 8/29: Morgan Stanley reiterated an Overweight rating on Amazon and increased its price target to $2,500 from $1,850 citing huge growth for the e-commerce giant’s traditional retail as well as web service units, according to a post on Businessinsider.com.
  • 8/27: Amazon opens its second Amazon Go convenience store, according to a post on techcrunch.com.
  • 8/27: Senator Bernie Sanders intends to introduce legislation that would require large companies like Amazon to pay a tax to cover the cost of federal assistance for their employees, according to a post on Businessinsider.com.
  • 8/22: MKM Partners sees Amazon as the best long-term growth investment available to investors today with potentially a $2.5 trillion stock market value by 2024. Amazon Web Services could be worth $1 trillion in six years, more than the current market cap of the entire company, which currently sits at $929 billion, according to a post on CNBC.com.
  • 8/16: Atlanta, Boston, Denver, Miami, Nashville and Northern Virginia are also strong contenders as Amazon narrows down choice for new headquarters, according to a post on CNBC.com.
  • 8/15: Amazon recently launched a curbside pickup service at two Whole Foods locations. Walmart has been operating a similar service since piloting a grocery pickup program in 2013. It appears Amazon is already providing the better service, according to a post on Businessinsider.com.

Summary

From a revenue versus growth perspective, Amazon stock is back to showing value even with 2019 expectations for slowing. The stock pulled back closer to the 200-day moving average finally. Web Services and advertising are among Amazon’s highest-margin businesses and making up an increasing proportion of the company’s total revenue. The effect of previous price hikes on Prime subscribers in May and June have had their first full quarter. Analysts remain bullish. Insider selling was about the same as last quarter, so some buying would be nice after this recent pullback. Over the last four quarters, the company’s EPS has beaten analyst consensus by an average of $1.34. Estimize consensus for an EPS of $3.77 on revenue of $57.607 bln compares to analyst consensus for an EPS of $3.12 on revenue of $57.12 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. $2.4 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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