Why Amazon Is Still Worth $620 Per Share Heading Into Earnings

• Amazon.com, Inc. AMZN is scheduled to announce its third quarter financial results on Thursday, after the market closes.
• On Monday, Bank of America Merrill Lynch released a preview of the results.
• The analysts expect a solid quarter, with potential upside for Amazon Web Services. Thus they reiterated a Buy rating and $620.00 price target.

Amazon is reporting its third quarter results on Thursday, and Bank of America Merrill Lynch analysts Justin Post and Paul Bieber envision “stable to accelerating” revenue growth and stable unit growth on a mixed retail environment in the U.S.

The experts expect:

• Prime Day to benefit the results and outlook
• Amazon Prime to have driven market share gains for the EGM category
• Momentum in Amazon Web Services revenue
• An “easy 4Q media revenue comp.”

On the risks side, they expound, the biggest may be a fourth quarter Street CSOI estimate of $1.8 billion, which could stand considerably above guidance, “depending on retail delivery, India and content investments.” However, this number could be eventually achievable if fourth quarter retail remains robust and AWS ramps.

Moreover, in the case of a disappointing CSOI outlook, the analysts “would expect buyers to emerge as the AWS/cloud story may be the best long-term theme in tech.”

The Estimates

For Amazon’s third quarter, BAML expects to see:

• Revenue of $24.9 billion, in line with the Street’s estimate
• CSOI of  $672 million, versus the Street’s $619 million
• Earnings of $0.84 per share, compared to the Street’s $0.87 per share.

The revenue estimate is based on 22 percent year-over-year unit growth – although sequentially flat. The experts believe a growth of 35 to 40 percent in gross profit “is needed to help maintain bullish thesis.”

“AWS growth, 3P mix, fulfillment center builds, video content spend, and India spending ramp are levers that can drive upside/downside to margins and EPS,” they add.

So, Why Is The Stock Worth $620?

BAML remains constructive on Amazon on the back of three main factors:

1) Prime traction will likely drive strong EGM revenue in North America

2) “AWS product, customer and revenue momentum”

3) Potential margin upside provided by AWS, the 3P mix and fulfillment efficiency.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.