Shares of Amazon.com Plummet Following Results, Analysts Maintain Confidence

Amazon.com AMZN on Thursday reported financial results for the first quarter ending March 31, 2014. Founder and CEO of Amazon.com Jeff Bezos commented, “We get our energy from inventing on behalf of customers, and 2014 is off to a kinetic start. Our device team launched Fire TV, offering great content, including our recently announced exclusive deal with HBO, and innovative features like unified voice search, which we're delighted is being adopted by so many new partners, including Netflix, HBO Go, Hulu Plus, Crackle and Showtime Anytime. "The team is working hard to keep Fire TV in stock. Our retail team launched Prime Pantry, a new option available only to Prime members offering exclusive access to everyday essentials in non-bulk sizes — ranging from breakfast foods and popular soft drinks, to cleaning and personal care items. And, our AWS team significantly lowered prices on EC2, S3 and RDS, saving AWS customers hundreds of millions of dollars over the next several months alone.” Summary of First Quarter Results

• The company reported first quarter EPS of $0.23 which may not compare to the estimated $0.24.
• Revenue came in at $19.74 billion which may not compare to the estimated $19.44 billion estimate.
• Net sales increased 23 percent to $19.74 billion in the first quarter compared with $16.07 billion from the same period a year ago.
• Operating cash flow increased 26 percent $5.35 billion over the past twelve months.
• Free cash flow increased to $1.49 billion for the past twelve months compared with $177 million from the same period a year ago.

Highlights

• The company reported video streams on Prime Instant Video almost tripled year-over-year.
• Amazon introduced Fire TV, new developer tools, Prime Instant Video for the United Kingdom and Germany, Prime Pantry, Dash and Flow.
• The company introduced its first game built specifically for Fire TV, Sev Zero.
• Amazon announced a content licensing agreement with HBO, with Prime Instant Video offering exclusive online only subscription home for select HBO programming. Prime Instant Video is also the exclusive online-only subscription home for 24, Orphan Black, The Americans, and Teen Wolf.
• Amazon Studios greenlit six original pilots for full seasons available to Prime members and two new pilots for The Cosmopolitans and Hand of God.

Second Quarter Guidance

• Net sales for the second quarter are expected to be between $18.1 billion and $19.8 billion versus the $19.03 billion estimate.
• Operating income loss is expected to be -$455 million to -$55 million, compared with $79 million in gains in 2Q13.

Analyst Respond

• Credit Suisse analyst Stephen Ju reiterated an Outperform rating on Amazon.com but lowered the price target from $449.00 to $439.00. Ju noted that second quarter guidance for net sales fell below Credit Suisse's estimates. The analyst decreased CSOI estimate from $3.2 billion to $2.2 billion. He wrote, “While unit volume growth receives a disproportionate amount of focus, we focus instead on retail gross profit dollar growth which we believe remained at ~28% excluding impact from AWS (33.2% including AWS). This coupled with continued benefit seen in moderation of shipping losses as Amazon continues to build its fulfillment footprint closer to the densest population areas are both affirmative data points to our long-term investment thesis and as such we maintain our Outperform rating.”
• Robert Peck from SunTrust Robinson Humphrey pointed towards the company's “rapid” member growth, including week over week). Peck emphasized the Amazon.com reported 244 million active members compared with 237 million last quarter, representing gains of more than 17 percent year-over year. The analyst added that the company continues to see rapid member growth following the price increase. Peck noted that the timing of the improved Prime video offering in Europe coincides. SunTrust maintained a Buy rating and lowered the price target from $460.00 to $425.00.
• Benchmark analyst Daniel Kurnos remarked that Amazon.com will likely see meaningful OIBDA margin expansion over the next few year amidst continued investment to support unit volume growth. The analyst added, “In addition to increased internal investment to build out the digital library, distribution center capacity and enhance offerings, like AWS, Amazon may be facing further margin pressure due to the success of its Amazon Prime offering. However, while the steady shift to 3P sales has been driving modest core margin improvement, Amazon's 4Q12 results highlighted what we view as the inherent leverage in the model as the sales mix also shifts away from physical and into digital content. Amazon has also been quietly building out its digital library of ebooks, TV shows and movies, and boasts content agreements with all of the major networks and studios across its three distribution platforms.”
• Analyst Neil Doshi from CRT Capital Group noted Amazon.com's increased investments and lowered the price target from $420.00 to $390.00 based on 2015 free cash flow. Doshi wrote, “We were encouraged by the fact that 1) Amazon continues to see good traction with new Prime subscribers despite the $20 price increase; 2) Revenue midpoint guide for 2Q of $19.0 billion implies ~21% growth at the midpoint; 3) Gross margins expanded 224 bps YoY to a record 28.8%, making this the 10th quarter in a row of GM expansion; and 4) AWS continues show strong growth. We reiterate our Buy rating as we believe AMZN will continue to take share in the secular shift from offline to online, is investing in key areas of growth like AWS, and continues to add value to its Prime membership, which creates strong loyalty and flywheels for the business.”

Stock Action

Shares of Amazon.com were up approximately 3 percent to a high near $348.00. In pre-market trading, the stock fell six percent from Thursday's close of $337.15. In morning trading on Friday, shares continued to take a hit down as much as 10.43 percent at $305.30 shortly after 10:30 a.m. (EST).