Amazon.com Inc. (NASDAQ: AMZN), the largest online retailer, is due to release its September ending quarterly results after market hours today, the 24th of October. The company has been chasing topline growth as its strategy which has put tremendous pressure on it’s already wafer thin margins.
Q3 2013 Expectations from Amazon
The company has always had topline growth as its primary focus. The bottom line has always been a second priority for the company. However a look at the last year-on-year revenue growth rate over the last 12 quarters shows a clear trend. The revenue growth rate has been slowing and slowing really fast. The last three quarters have seen revenues rise by just over 20% and there are indications the growth rate will sink even further.
One of the latest moves by the company has been to increase the minimum order value for free shipping, from $25 to $35. The move comes at a time when the company has already been facing headwinds to its revenue growth, which is shown in the chart above. Now we do believe that free shipping is one of the important facts, if not the most important, which encourages people to shop online. What if this was a catalyst for some amount of growth seen at Amazon? Well we wouldn’t like to think about the disaster but we will warn you that it will be a ‘Double Whammy.’ The company needs to see over 22% increase in revenue in order to see revenues in line with current estimates.
Earnings history and analyst estimates
It isn’t a secret that the company hasn’t done too well when it comes to earnings. Nevertheless, one fact that will worry Amazon investors will be that the company has missed revenue estimates in 6 out of the last 7 quarters, according to streetinsider.com. Now that would be a bitter pill to swallow considering the value Bezos and his team give to topline growth. The first two quarters of 2013 saw the company miss analyst’s revenue estimates and it will be an uphill task for the company to topple estimates for Q3 2013 and FY 2013.
Amazon Stock price movement
The company has been missing revenue estimates consistently. However every miss in revenue estimates has been followed by an increase in the stock price. The movement in stock price has baffled a number of analysts, including us. The stock has gained over 66% since January 2012, a period which saw the company miss revenue estimates in 6 out of 7 earnings calls.
We aren't too optimistic about the stock selling at an insanely high price-to-earnings multiple close to 2400. While there will be a number of experts who will say price-to-earning ratio isn’t the right way to value Amazon, the revenue levels at which the company currently operates, the lack of concern to the bottom line, is an extremely risky strategy. This strategy can wipe out investor wealth as fast as the drop in Amazon’s topline growth. The latest move from the company to raise the limit of shopping for availing free shipping may be a step to ease the pressure on its already sagging bottom line. However, this might just be a case of ‘Too little, too late’.
We feel that it will be very difficult for the company to achieve a 22% growth rate in order to match current analyst estimates of the quarterly revenue. Our opinion is mainly strengthened by three facts:
♦Revenue growth has significantly slowed down in the last four quarters on a Y/Y basis.
♦The number of visitors to Amazon websites hasn't seen any significant jump in the last quarter as per ComScore reports.
♦The latest move by the company to raise the minimum order value to avail free shipping.
We are convinced it is not a question of whether or not the company will miss the quarterly analyst revenue estimates of $16.7 billion, it is more a question of by how much the company will miss the estimates. Bring it on Bezos. No surprises in there!
To see Amazon’s current price, please click here: (NASDAQ: AMZN)