North America

Earnings Preview: Amazon Q4 2017 (AMZN)

By: Craig Bowles

Overview

Amazon.com (AMZN) is slated to report 4Q 2017 earnings after the close on Thursday, February 1st. 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 4Q 2017 period in the October (3Q) earnings release:

  • Net sales: The Company guided between $56.0 bln and $60.5 bln. Analysts expect an increase of 36.7% y/y to $59.81 bln. (Source: Yahoo! Finance) Revenue is a critical measure for Amazon and often dictates the after-hours trading action. Consensus was $58.85 bln three months ago.
  • The company also indicated operating income is expected to be between $300 mln and $1.65 bln.
  • Earnings Per Share (EPS): Amazon typically reports a “clean” figure that compares with consensus estimates. The Street estimate is for $1.84 (range $1.21 to $2.62). Consensus was $1.74 three months ago.

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

  • Revenues Guidance 1Q2018): Analyst consensus is for up 36.3% y/y to $48.66 bln (range $47.27 bln to $50.06 bln).
  • Operating Income (Loss) Guidance (1Q2018): 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 26.9x compares to the 5-year average 18.7x; Price/Sales 4.2x compares to the 5-year average 2.5x; Price/Cash Flow 41.6x compares to the 5-year average 27.7x. (Price/Sales shows good value at up to 5.8x 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 51 (42 two qtrs. ago) Buy, 2 Hold, and 0 Sell ratings. (source: com)
  • Insiders sold 1,019,335 shares during the last three months and 2,080,617 shares over the past year. (source: MarketBeat.com)
  • Amazon shares have a 1-day average price change on earnings over the past eight quarters of 5.39%. Options are pricing in an implied move of 5.25% off earnings.

Recent News

  • 1/22: Amazon has opened its new cashier-less store, Amazon Go, with no lines and no waiting, according to a post on Businessinsider.com.
  • 1/22:Cowen notes that Amazon Prime subscribers are younger and have a higher household income than customers from Target (TGT), Walmart (WMT), Costco (COST) and Macy’s (M) and Amazon’s general shoppers, according to a post on Barron’s.com.
  • 1/20: Amazon announced an immediate price hike of $2 for its Prime monthly subscription, from $10.99 to $12.99 a month. Expect a 20% increase to $119 for annual Prime memberships next, according to a post at Forbes.com.
  • 1/10: JP Morgan has Amazon as a “Best Idea for 2018” and sees 55% compounded yearly revenue growth for Amazon’s advertising business, reaching $6.6 billion by 2019. Although Amazon currently controls 42% of U.S. ecommerce spending, it only controls 10% of U.S. online ad spending, according to a post on Barron’s.com.
  • 1/2: Amazon reported that customers shopped at “record levels” during the holiday season and that four million people started prime free trials or paid memberships during one week of the holiday season alone, according to a post on Motley Fool.com.
  • 12/22: RBC suggests that a combination of voice-enabled sales, device sales, and revenue from the Alexa platform will generate $10-$11 billion in revenue for Amazon by 2020, according to a post on Business Insider.com.
  • 11/5: Amazon founder and CEO Jeff Bezos sold 1 million shares ($1.1 bln) in his company following a strong earnings report. Bezos sold the shares starting on Nov. 1 at an average price of just under $1,100 each but still owns 16% of the company, according to a post on Fortune.com.

Summary

Amazon’s having opened its first cashier-less store makes you wonder how long before their 460 Whole Foods locations will be converted. The effect of price hikes on Prime subscribers will be watched closely this year. JP Morgan argues that based on its various opportunities for growth, Amazon is poised to outperform again in 2018. Analysts continue their bullishness. Insider selling ramped up over the past three months. Over the last four quarters, the company’s EPS has beaten and missed analyst consensus by an average of 52c. Estimize consensus for an EPS of $1.96 on revenue of $60.521 bln compares to analyst consensus for an EPS of $1.84 on revenue of $59.81 bln. Amazon’s operating income guidance was optimistic and reports above the high end of guidance have coincided with positive market reactions. $1.65 bln is the high end for this quarter. Market participants will also focus on next quarter’s guidance.

 

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