Amazon Earnings Preview: Will Q4 Report Satisfy Investors?

Online retail giant Amazon.com, Inc. AMZN is due to release its fourth-quarter fiscal 2017 results after the close Thursday, Feb. 1.

Consensus Q4 Estimates

EPS: $1.84.
Revenue: $59.81 billion.

Full Year 2017 Estimates

EPS: $4.25.
Revenue: $177.26 billion.

Amazon derives roughly 30 percent of its revenues and 40 percent of its EPS from the fourth quarter. In its third-quarter report, Amazon guided Q4 net sales to $56 billion-$60.5 billion, including a 1,000-basis-point boost from the Whole Foods Market, Inc. WFM acquisition and a $1.2-billion favorable forex effect. The guidance also called for operating income of $300 million to $1.65 billion.

How The Stock Responds

After a second-quarter miss reported after hours on July 28, Amazon stock fell over 3 percent in the subsequent session. The third-quarter beat elicited a more than 13-percent rally Oct. 27. The earnings estimate for Q4 has not changed substantially over the past 90 days and has moved in a narrow range from $1.83 to $1.85.

Sell-Side Takes

KeyBanc Capital Markets analyst Edward Yruma predicts "happy and healthy" holiday season results and consequently market share gains.

AWS revenues are projected by Yruma to scale up 40 percent to nearly $20 billion. That said, Yruma said a hit to AWS margins could come as a result of the Meltdown and Spectre vulnerabilities.

Canaccord Genuity's Michael Graham expects secular and seasonal strength on the revenue front. But the analyst is wary about the first quarter consensus EPS estimate.

"We think Q4 will be another impressive holiday quarter for Amazon, and believe the recent focus on hardware launches may intensify further Amazon.com purchase activity," Graham said.

Investors should expect international expansion and increased Prime benefits to drive membership despite tougher subscription services comps, according to Canaccord. Graham said he expects sequential improvement in North American and international operating margins, although by less than what was seen in 2016's Q4.

Canaccord Genuity has a Buy rating and $1,500 price target for Amazon, while KeyBanc rates Amazon a Sector Weight.

Amazon News

On Tuesday, a not-for-profit health care partnership between Amazon, Berkshire Hathaway Inc. BRKBRK and JPMorgan Chase & Co. JPM was announced.

Amazon said 2017 was Prime's best year, with 5 billion items shipped worldwide using the subscription service.

Amazon opened its first Amazon Go cashierless stores to the general public in earlier this month after testing the concept with employees in 2017. The Just Walk Out Technology automatically detects products picked up from and returned to shelves in a virtual cart and then charges the customer's Amazon account when they leave the store.

The Outlook

For the first quarter of 2018, analysts on average estimate earnings of $1.82 per share on revenue of $48.73 billion. One year ago, the company earned $1.48 per share on revenue of $35.71 billion.

Consensus estimates for 2018 call for earnings of $8.13 per share, up an estimated 88 percent, and revenue of $228.92 billion, up about 29 percent.

Amazon's key stories for 2018 are, according to Canaccord Genuity:

Elevated revenue growth.
Competition for AWS from Microsoft Corporation MSFT's Azure.
Elevated EPS expectations for 2018-2019, especially as domestic margins have been contracting year-over-year.

The Stock

Amazon shares are up about 73 percent over the past year, while shares gained about 22 percent in Q4. Since late December, the stock has seen a sharp run-up, and the 14-day relative strength index is at 88.65, suggesting the stock is oversold.