Amazon.com Inc (NASDAQ:AMZN) stock could see another correction if the company misses on the EPS target again.
Seattle based eCommerce giant Amazon.com Inc (NASDAQ:AMZN) is scheduled to report its third quarter earnings results on Thursday, 26th October. Amazon stock has remained under pressure since the last quarter earnings. While Amazon had reported strong top line performance with revenues beating estimates by $800 million, the bottom line had come in much below expectations. The eCommerce giant had reported 40 cents in EPS against analysts expectation of an EPS of $1.4. Amazon stock had sold-off over 10% after the earnings, before making some recovery. Amazon stock is still down by over 5% since the last quarter earnings.
Operating Income will remain under pressure.
The main reason for the lower than expected profits in the previous quarter was continued investments in its current and businesses. Amazon invested heavily in its video content and fast-growing market likes India. And this has continued in the third quarter as well, hence expected, Amazon to report muted profits. During the second quarter earnings call CFO Brian Olsavsky had made it clear that Amazon remains committed to investing heavily in growth opportunities like fulfillment capacity, video content, India and Amazon Web Services infrastructure.
Amazon has guided for its operating profit in the third quarter to range between loss of $400 million and profit of $376 million. The mid-point represents an operating loss of $12 million. This compares to operating income of $575 million in the year-ago quarter. Amazon stock could see another correction if the company fails to meet even its own guidance. The operating guidance too was one of the factors which weighed heavily on Amazon stock after the earnings as analysts were expecting operating profit of $950 million.
On the bottom line, Analysts expect Amazon to report non-GAAP EPS of 3 cents, a massive drop from 52 cents EPS the company had reported in the same quarter last year. It is also lower than 40 cents the company had reported in the second quarter. Analysts' EPS expectation has trended lower in the past few months from $1.1, 90 days ago to an EPS of 3 cents now.
Amazon revenues will see healthy growth.
While the bottom line is under pressure, analysts continued to see strong top line growth. Analysts expect Amazon to report revenues of $42.05 billion, representing a year-on-year growth of 28%. Of course, this number is boosted by the inclusion of a partial quarter of Whole Foods Market (NASDAQ:WFM) which Amazon has acquired earlier this year. Excluding WFM results, Amazon had guided for its Q3 revenue to come in the range of $39.25B to $41.75B representing 25% YoY growth at the mid-point. Given that Amazon continues to trade at very expensive multiples, forward PE of 131 and PS ratio of 3.15, it is imperative that Amazon continues to deliver strong top-line growth to sustain its valuations.
Amazon has continued to invest heavily in growing areas including video content and grocery. AWS continues to remain a strong growth driver for Amazon and contributes most of the companies operating profit. In the previous quarter, AWS reported operating profits of $916 million, while Amazon as a whole reported operating profits of $618 million. So, AWS remains crucial for Amazon's profitability and growth.
Can Whole Food's acquisition deliver?
For the first time, Amazon's earnings report will include the partial quarter performance of WFM. Amazon had acquired WFM for whopping $13.7 billion, 27% premium to its prevailing market cap. And just after taking over, Amazon had slashed prices across the board at WFM stores. And this strategy could be paying off. According to Foursquare Labs Inc, the footfalls in Whole Food outlets jumped by over 25% in the days after the price cuts.
Not only that, sales of WFM products on Amazon.com has also jumped up. Amazon had put 2000 popular products from Whole Foods 365 Everyday Value brand on site for sale. Most of the products got sold out according to data collected by One Click Retail. Web sales of Whole Foods branded products totaled about $500,000 in the first week, according to One Click Retail’s estimate. Investors will be keenly listening to management's commentary about the performance and its strategy relating to Whole Foods. For the current quarter, Piper Jaffray's Michael Olson expect WFM revenues to make up around $1.4 billion of Amazon's revenues, while RBC Capital analyst Mark Mahaney expects WFM revenue for the partial quarter to come around $1.2 billion.
Avoid Amazon stock going into the earnings.
Analysts continue to remain bullish on Amazon stock in the long run, given the strong growth drivers. Piper Jaffray's Michael Olson has an Overweight rating on Amazon stock with a price target of $1,200. The average analysts' price target on Amazon stock is $1,163. According to Yahoo Finance data, of the 44 analysts tracking Amazon stock, only one has a sell rating on it. However, despite the bullish commentary from analysts, investors must wait for the third quarter earnings before buying the stock. Another miss on the bottom line, especially if the EPS numbers fall below zero, could result in a steep correction in Amazon stock.
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