Amazon Is Committed To Widening Margins

With Amazon.com, Inc. AMZN scheduled to report its Q4 results on February 2, Wedbush’s Michael Pachter expects the company to continue to deliver significant earnings growth.

Margin Expansion

“Even after modest Q3 earnings results, Amazon’s outsized beats in 1H:16 and still meaningful y-o-y EPS growth in Q3 are a signal that the company intends to grow profits despite the quarterly variability,” Pachter mentioned.

While the gross and operating margin growth at Amazon Web Services (AWS) has outpaced revenue growth, the analyst expects the mix of AWS and Fulfillment by Amazon (FBA) to drive further gross margin expansion, while Prime membership growth has “continued unabated.”

“Monthly Prime subscription offering should have bolstered the number of Prime customers around the holidays, and although gross margin expansion is being tempered by increased video content spending, the trajectory is clear and the company’s investment strategy purposeful,” the analyst stated.

Q4 Expectations

For Q4, Pachter expects Amazon to report its revenue at the high end of the guidance range, beating the consensus and the estimate, driven by robust Prime membership growth, strong sales of Amazon-branded products and AWS expansion.

The operating is also expected to beat expectations and the guidance.

However, the analyst noted that Amazon “appeared to accelerate spending on film and TV content, additional fulfillment centers, fresh food delivery expansion, and AWS products and features, primarily funded by the expansion of high growth, high margin categories.”

Pachter reiterated an Outperform rating on Amazon's stock, with a price target of $900.