North America

Earnings Preview: Amazon Q4 2016 (AMZN)

By: Craig Bowles

Overview

Amazon.com (AMZN) is slated to report 4Q 2016 earnings after the close on Thursday, February 2nd. 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.

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Outliers & Strategy

Amazon provided the following guidance for the 4Q 2016 period in the October (3Q) earnings release:

  • Net sales: The Company guided between $42.0 bln and $45.5 bln. Analysts expect an increase of 25.0% y/y to $44.67 bln (range $43.46 bln to $45.89 bln). (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $44.60 bln three months ago.
  • The company also indicated operating income is expected to be between $0 and $1.25 billion.
  • Earnings Per Share (EPS): Amazon typically reports a “clean” figure that compares with consensus estimates. The Street estimate is for $1.35 (range $0.36 to $1.86). Consensus was $2.14 three months ago.

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

  • Revenues Guidance 1Q2017): Analyst consensus is for up 23.3% y/y to $35.91 bln (range $34.52 bln to $36.95 bln).
  • Operating Income (Loss) Guidance (1Q2017): 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 22.4x compares to the 5-year average 17.1x; Price/Sales 3.2x compares to the 5-year average 2.2x; Price/Cash Flow 27.6x compares to the 5-year average 27.7x. (Price/Sales shows good value at up to 4.5x 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 43 Buy, 4 Hold, and 0 Sell ratings. (source: MarketBeat.com)
  • Insiders sold 29,420 shares during the last three months and 2,158,223 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 8.38%.

Recent News

  • 01/23: Amazon has conquered books, apparel, and electronic gadgets. Next up, Auto Parts, according to a post on Barron’s.com.
  • 01/21: Morgan Stanley remains bullish on Amazon as membership in Amazon Prime, Echo sales, and Google Trends data all point to strong 2017 top-line trends, but is taking a more conservative stance on 2017 profitability citing investment spending…in particular around last-mile delivery, Prime Now, Amazon Fresh, pickup locations, media content, and Amazon Web Services, or AWS, according to a post on Barron’s.com.
  • 01/13: Maxim Group reiterated a Buy rating on Amazon which pledged to add 100,000 new jobs (with full benefits) in the U.S. over next 18 months, which would bring its total to greater than 280,000, according to a post on Barron’s.com.
  • 01/12: Cowen thinks stores could address some of Amazon’s online weaknesses. Five Amazon bookstores are slated to open on the east coast. Amazon sees the potential for as many as 2,000 grocery stores, according to a post on Barron’s.com.
  • 01/04: Amazon is reportedly in talks to buy out the bankrupt clothing maker American Apparel, according to a post on Barron’s.com.

Technical Review

Amazon’s stock has been in an uptrend since November 2008 and 2016 pushed above trend in making the October 6th $847.21 all-time high. The stock is again approaching that level after pulling back close to the 200-day moving average. 2013 did this to a lesser extent before a four-month correction and a year of consolidation, so this three-month pull back was shorter. Point and figure technicians have increased their bullish price objective to $964 from $899. (Chart courtesy of StockCharts.com)

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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. Over the last four quarters, the company’s EPS has beaten and missed analyst consensus by an average of 50c. Estimize consensus for an EPS of $1.51 on revenue of $44.954 bln compares to analyst consensus for an EPS of $1.35 on revenue of $44.67 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 and last quarter’s coming in below the high end so saw the stock punished. $1.25 billion is the high end for this quarter.

 

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