Amazon Earnings Review Q3 2015

  • Amazon reported better than expected revenues and EPS results.
  • Amazon reported record AWS net sales with 78% YoY growth, and firm guidance that reflects 19% annual growth.
  • Analysts hiked price targets by $100 on average to $741.

Tech giant Amazon (NASDAQ:AMZN) reported its Q3 2015 earnings last week with higher than expected revenues, at $25.36 billion, and a better than expected EPS that triggered an 8% surge in the company’s stock price after hours. In my Amazon earnings preview article that was published before Amazon’s earnings release, I highlighted two topics that will be in focus for the earnings release: AWS financials' growth and prime day impact.

On the AWS front, as shown in the chart below, Amazon again presented very strong results, with $2.1B net sales and a $521M operating income, reflecting a 78% and 432% YoY growth, respectively. Amazon reported record revenues and operating income for the cloud computing segment; once again highlighting its importance for Amazon, when AWS accounts for 8% of the company’s net sales while it accounts for 52% of the company’s segment operating income.

AMZN_chart 10_102515

Source: Amazon’s Q3 2015 Financial Results, Conference Call Slides

Amazon mentioned once again the AWS product announcements from the recent re:Invest conference that included QuickSight, AWS IoT, Amazon Kinesis Firehose, etc. With the new initiatives, Amazon is not only strengthening its central position in the cloud computing market, but also attempting to penetrate the big data analytics and visualization markets.

On the marketplace front, Amazon mentioned a few times the successful Prime Day that boosted international sales by about 200 basis points, and it was mentioned as one of the reasons for the significant results and strong Q4 guidance. Marketplace net sales rose 28% YoY in North America, and 7% internationally. However, this segment (and the other segment) accounted for only 48% of the segment operating income, while it accounts for 92% of net sales. Segments contribution to the company’s net sales and operating income emphasizes once again AWS’s importance for the company and may indicate that spinning-off AWS will remove any shareholder value from Amazon.

Amazon is still not giving up on its Fire Tablet devices and its new low-cost devices include a $50 Fire Tablet, $100 Fire Tablets for kids, and a special price offering for quantities of six. Jeff Bezos shed some light on the new strategy: “For the first time, we’re recommending you bring home a six-pack for the whole family, at a price of $50 for one or $250 for a six-pack; Fire sets a new bar for what customers should expect from a low-cost tablet. This is one more step in our mission to bring customers premium products at non-premium prices. Fire is the #1 best-selling product on Amazon.com since launch, and based on the strength of the customer response, we are building millions more than we’d already planned.” With the intense competition in the tablets market, the new pricing strategy seems like Amazon’s last effort to remain relevant.

Amazon Q4 2015 Guidance

Amazon provided net sales Q4 2015 guidance of $35.1B, which was in line with analysts’ expectations and presented a 19.5% YoY growth. Amazon’s Q4 guidance reflects the full year 2015 net sales of $106B, which is a 19% annual growth compared to 2014 and reflects a share price of $628, with a conservative P/S ratio of 2.75.

Investors cheered Amazon's earnings performance, driving the stock price higher on Friday.
AMZN stock chart

Amazon stock price chart by amigobulls.com

Amazon Price Targets By Analysts

Amazon’s results and guidance were followed by growth rate and price target hikes across the board, with 26 analysts setting the median price target of Amazon at $741, which is 15% higher than the previous price target of $650. The new target reflects an impressive upside of 24% for Amazon's stock from the current price.

These are the Amazon’s earnings figures compared to expectations and previous year:

Q3’15 Actual Q3’15 Guidance Q3’15 Consensus Q3’14
Revenues $25.4B $24.4B $24.91B $20.58B
Non-GAAP EPS $0.17 -$0.13 -$0.13 -$0.95

Source: Amazon IR, Thomson Reuters

Conclusion

Amazon reported higher than expected results in its Q3 2015 earnings release. The Amazon Web Services segment reported net sales of $2.1B and accounted for 8% of revenues and 52% of operating income while the marketplace and others segments accounted for 92% of revenues and 48% of operating income. Amazon also introduced some low-cost Fire Tablets with less than a $100 price tag that seems like the company’s last effort to penetrate the tablets market and gain substantial share. Analysts were very impressed with Amazon’s results and hiked the mean price target in around $100 to $741 that reflects an attractive 24% upside. Amazon announced new AWS initiatives to support the company’s future growth and generate revenues from new revenue streams in the cloud computing market.

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