Amazon Q3 Earnings Preview

• Amazon is scheduled to release its third quarter results on 23rd October.
• ChannelAdvisor’s data show strong growth in same store sales, while the Fire Phone sales have not picked up.
• Amazon has not delivered positive earnings surprise in last four quarters.

AMZN_Q3

Amazon (NASDAQ:AMZN) is scheduled to release its third quarter results on 23rd October. Amazon stock is down 22.6% this year compared to 1.2% gain in NASDAQ, after missing its Q2 earnings estimates. Amazon had a disappointing Q2 2014 with Earnings per Share (or EPS) of  - $0.27, well below the analyst’s expectation of -$0.15. Sales of the Fire Phone were also below expectations forcing Amazon to cut prices.

AMZN-stock-chart_Q3

Barely six weeks after its launch Amazon slashed Fire Phone’s price to $0.99 with a two year contract from $199 earlier. Off-contract version’s prices were cut from $699 to $499. Initial price of Fire Phone was at par with other high end smart phones, which surprised many as Amazon always tries to undercut its competitors. Analyst do not expect any material change in revenues from Fire phone due to the cut in prices.

Amazon’s Brick and Mortar foray

According to WSJ, Amazon is planning to open a retail store in Manhattan, just across the street from Empire State Building. The Manhattan store is likely to be the place for customers to pick the orders which they have made online. It is also going to serve as a distribution center for couriers, especially one day delivery orders. The idea of brick and mortar presence might have come from Apple which has stores in several locations. However, the idea has not gone down well with many analysts. Amazon’s customers are endeared to it because of its hassle free online shopping and hence, brick and mortar stores will not be attractive to its online customers.

Amazon's Revenue Obsession

Traditionally Amazon has focused more on revenue growth. It has registered high revenue growth and gross profit margin, but its operating margin has suffered. Last twelve month (LTM) Amazon revenue has registered a 20% YoY growth and gross profit margin has remained north of 25%, reaching 30% in Q2 2014. Its operating margin has fallen below 1%. However, Amazon generates huge operating cash flows.

Revenue Guidance and Analyst Estimates

Amazon has given a revenue guidance of $19.7 billion to $21.5 billion, implying a YoY revenue growth of 15% to 26%. ChannelAdvisor’s data on Same Stores Sale by Amazon shows a robust growth. According to ChannelAdvisor, Amazon’s Same Stores Sales for the month of July, August and September saw a robust growth of 40.4%, 45.1% and 37.9%. However, this data only tracks third party sales on Amazon, which made close to 40% of Amazon’s unit sales in Q2. Analysts estimate Amazon revenue for Q3 to be $20.84 billion. Strengthening of US dollar against major currencies especially Euro is likely to act as material headwind for the company. Last quarter the company had a favorable impact of $237 million on revenues due to year-on-year change in exchange rate.

Amazon expects Q3 2014 operating loss to widen to $410 million-$810 million, compared with $25 million in Q3 2013. Analyst estimate for Q3 EPS of -$0.74, lower than -$0.09 in Q3 2013 and -$0.27 in Q2 2014. There is a seasonal decline in Amazon's Q3 EPS.

Amazon_Q3

Amazon has not delivered any positive earnings surprise in the last four quarters. In fact it has performed below the market expectations with its Q2 EPS being 80% below analysts estimate.

Amazons Earnings History_Q3

Source: Yahoo Finance

Conclusion

Based on strong growth in Same Stores Sales, Amazon is likely to meet its revenue guidance. However its low profitability margin and high P/E ratio remains a concern. Amazon’s topline focused strategy could end in trouble. High PE ratio and low profitability represents a serious risk to investors, which is reflected in our current Amazon stock analysis.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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