'Margins To The Rescue' After Amazon Misses Q2 Sales Estimates

Amazon.com, Inc. AMZN reported earnings for the second quarter Thursday. Earnings per share and sales came in at $5.07 and $5.29 billion, respectively.

The company also issued guidance for Q3 just below consensus estimates, but with significantly higher operating profits. It was this better-than-expected margin growth that drove shares higher Friday morning.

The Street Weighs In

It’s not as if Amazon had any bears on Wall Street before, but analysts are more convicted than ever in the e-commerce giant’s upward trajectory. The name of the game was numbers following the earnings call, with fundamental analyses largely remaining unchanged.

Revenue grew by 37 percent annually on a forex-adjusted basis in Q2, slightly below the Street’s 38 percent estimate.

“Retail growth is likely suffering a bit from the law of large numbers,” said KeyBanc analyst Edward Yruma in a note. E-commerce sales growth, while still the strongest in retail, has been slowing over the past four quarters.

'Margins To The Rescue'

Amazon’s profitability is reaching new highs, though. Gross margins stood at a record 42 percent and operating margins of 5.6 percent are the highest since Q1 of 2005. "Margins to the rescue," said Piper Jaffray's Michael Olson.

Advertising, Amazon Web Services and other high-margin revenue streams continued to grow at mid- to high-double digit rates. Perhaps most notably, AWS grew 49 percent year-over-year during the quarter.

“While still relatively small, Amazon's ‘other’ revenue segment also showed meaningful growth, both domestically and internationally,” said Jefferies analyst Brent Thill. “We see this segment creating halo effects for the core commerce business, while also providing yet another higher-margin revenue stream for Amazon.”

Management said an unusually light quarter for investments in capex and headcount contributed to margin growth. Morgan Stanley’s Brian Nowak also highlighted increased efficiency in retail operations — which cost $600 million, 7 percent, less than expected even with ongoing investments in Whole Foods.

Looking forward, management guided operating income in the range of $1.4 billion to $2.4 billion, doubling consensus estimates at the high end.

Management also expects the acquisition of PillPack to close in the second half of the year.

The Ratings

• Jefferies analyst Brent Thill maintained a Buy rating and raised his price target from $1,950 to $2,185.
• JMP analyst Ronald Josey maintained a Market Outperform rating and raised his price target from $1,840 to $2,075.
• KeyBanc analyst Edward Yruma reiterated a Sector Weight rating, without a price target.
• Morgan Stanley analyst Brian Nowak maintained an Overweight rating and raised his price target from $1,700 to $1,800.
• Piper Jaffray analyst Michael Olson maintained an Overweight rating and raised his price target from $2,075 to $2,100.
• Stifel analyst Scott Devitt reiterated a Buy rating and $2,020 price target.
• Wedbush analyst Michael Pachter maintained an Outperform rating and raised his price target from $1,800 to $2,100.
• Wells Fargo analyst Ken Sena maintained an Outperform rating and raised his price target from $1,875 to $2,110.
• William Blair analyst Ryan Domyancic reiterated an Outperform rating.

At time of publication, the stock was trading around $1,839.50

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