Analysts React To Amazon's Mixed Earnings, Holiday Guidance

Amazon.com, Inc. AMZN reported third-quarter earnings Thursday, announced new product launches and adjusted its fourth-quarter guidance.

Q3 EPS of $5.75 beat a $3.12 consensus estimate, while sales of $56.576 billion missed the consensus of $57.1 billion. Q4 sales guidance came in a range of $66.5 to $72.5 billion, below expectations of $73.89 billion. 

The Analysts

• Bank of America Merrill Lynch analyst Justin Post reiterated a Buy rating on Amazon and lowered the price objective from $2,200 to $2,000. 
• Benchmark analyst Daniel Kurnos reiterated a Buy rating and $2,100 price target.
• BMO Capital Markets analyst Daniel Salmon reiterated an Outperform rating and $2,250 price target.
• Canaccord Genuity analyst Michael Graham reiterated a Buy rating and $2,100 price target.

Revenue

Amazon's subscription and advertising revenues were in-line, said Benchmark's Kurnos.

“While we believe we could argue that Amazon remains undervalued from a cash flow perspective, we still see plenty of room for top-line growth despite revenues likely to eclipse $230 billion in 2018, as international Prime selection still remains a large laggard to the domestic market even in more mature geographies, while the blueprint for scaling up growth in developing markets has evolved to become more efficient from both a revenue and cost perspective."

Benchmark anticipates the shortfall to affect shares and said Amazon's transition from growth to value "is still a ways away." 

North America vs. International

Amazon reported another strong quarter in the North American business, with revenue growing roughly 25 percent. The company highlighted the difficulty in projecting Q4 revenue due to how it's bunched from mid-November to the end of the year — meaning Amazon's guidance is likely conservative, said BMO's Salmon. 

“We also expect 4Q to be a big quarter for the advertising business and expect it to help offset some of the pressure from recent wage hikes. Important to note that the company does not expect the proposed USPS price hikes to have a material impact on profitability.”

On the international side, losses again improved for the second quarter. The company’s advertising business should aid its margin profile, the analyst said. 

Q4

Amazon drove strong margins and profit upside from the cloud business, but the Q4 outlook is lacking due to accounting changes and employee raises, said BofA's Post. Deceleration in overall Q4 growth will continue to be a focal point going forward, he said. 

“Amazon has been financially disciplined and has been able to drive efficiencies out of its existing operations to deliver solid profit upside. We see opportunities in online grocery, pharma, B2B to help reaccelerate growth, while higher-margin business strength can continue to drive higher operating margins.”

Amazon’s “soft” Q4 revenue guidance reflects a 6-percent drop and is driven by three causes, said Canaccord's Graham. They are:

• The first full quarter of contribution from Whole Foods.
• The $300-million headwind from changing Prime subscriptions.
• Conservatism from a tight holiday shopping window.

Price Action

Amazon shares were down 8.58 percent at $1,629.33 at the time of publication Friday. 

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Photo courtesy of Amazon.