'Web Services was the star of the show yet again': Here’s what Wall Street is saying about Amazon’s record earnings


Amazon on Thursday posted its largest quarterly profit in its more than two decades as a publicly-traded company.

The earnings were more than double what Wall Street analysts had expected – at $US5.07 per share – leading to a slew of upgrades and price target changes.

Nearly every analyst notes that Amazon’s gross margin was a major driver of their freshly raised price targets, especially fuelled by Web Services, one of Amazon’s fastest-growing units.

Here’s what the Street is saying about the record quarter:

Goldman Sachs

Price target: $US2,300 (from $US2,100)

“We continue to believe that we are in the sweet spot between Amazon investment cycles where new fulfillment/data centres are driving accelerating growth while incremental capacity utilization and efficiency is driving margin expansion,” analyst Heath Terry said.

“Higher level, we remain in the early stages of the shift of workloads to the cloud and the transition of traditional retail online and, in our opinion, the market continues to underestimate the long-term financial benefit of both to Amazon.”

He continued: “While Amazon continues to invest in growing the underlying infrastructure in both its retail and cloud businesses (albeit at a slower pace for the moment), expanding its content, developing new markets like India and Brazil, scaling its ad business, and entering new categories like healthcare, it does so while delivering significantly above average returns on investment.”

RBC Capital Markets

Price target: $US2,100 (from $US1,900)

“Amazon Remains An Internet Staple: This was another very impressive quarter, fundamentally speaking,” analyst Mark Mahaney said. “

64 Straight Quarters (except for 1 qtr) of 20%+ organic Revenue Growth, though Profitability has admittedly been… uneven. But now, it’s uneven UP, thanks to what we view as the Best Revenue Mix Shift Story In Tech – i.e. AMZN’s fastest growing businesses (AWS and AMS) are high-margin.”

He added: “We also believe AMZN’s Core Retail biz is (finally?) benefiting from scale efficiencies. Only thing required was a $US200B revenue run rate… And AMZN’s Growth Outlook is arguably the strongest of the Major ‘Net Platforms, because it faces the Largest (and Least Penetrated) total addressable market share (TAMS) – $US20T Retail (10%) and $US1T Cloud (10%)…along with $US1T Advertising (30%), $US5T Business Supplies (10%)…and maybe others.”

Nomura Instinet

Price target: $US1,990 (from $US1,808

“In a critical time, Amazon’s stellar sales and burgeoning margin expansion helped decouple it from its FANG peers,” analyst Simeon Siegel said. “We continue to believe the composition of Amazon’s sales growth signals its future margin trajectory, putting it on a march to increasing (& under-appreciated) profitability, w/2Q18 representing the company’s largest margin expansion in ~two years.”

He continued: “As such, we wonder whether AMZN has actually reached a size that makes it difficult to “outspend” sales growth, suggesting that, looking ahead, leverage could come from GM and SG&A.”

UBS

Price target: $US2,150 (from $US1,830)

“While some investors could focus on slower paid unit growth and little/no upside to NA eCommerce revs, we think those neutral/negative points were overwhelmed by better a better gross/operating margin profile (the scale and profitability of new businesses is taking hold), positive commentary on AWS (cloud computing) and prospects of building/scaling a global digital media & advertising platform,” analyst Eric Sheridan said.

“Despite the strong performance (+55% YTD), we still see AMZN reaching new highs over the next 6 -12 months as the prospect of seasonally strong periods for shopping and advertising play out.”

Credit Suisse:

Price target: $US2,100 (from $US2,000)

“As we have called out previously, Amazon has entered a relative harvest cycle, and 2Q18 results showed incremental margin expansion – year over year and sequential – for North America, International, and AWS reporting segments,” analyst Stephen Ju said.

“As expected, AWS also reported accelerating FX-neutral revenue growth as it lapped price cuts from last year. Hence despite the modest shortfall versus our revenue estimates, operating income at $US3b was significantly ahead of guidance, consensus, and our estimate.”

Jefferies

Price target: $US2,185 (from $US,1950)

“Every major segment of the business contributed to results and we see big tailwinds coming behind some of the most meaningful segments, incl. AWS, Prime, and the fast-growing advertising business, analyst Brent Thill said.

“We continue to highlight the strategic importance of AWS to investors, which we think can cross $US68B in annual revenue by 2022, becoming one of the largest enterprise software companies on the planet, and providing $US375B+ of market value (vs. AMZN market cap of $US877B today) over time.”

He added: “No change to our positive thesis – the dominance of higher-margin AWS continues to afford Amazon the luxury of investing significantly back into the core commerce business, creating a virtuous cycle for both Amazon and its investors.”

GBH Insights

Price target: $$US2,000

Overall, we would characterise these results as strong, with the bulls likely a bit disappointed that a “beat and raise” on the topline did not materialise,” analyst Daniel Ives said.

“AWS was the star of the show yet again, with North American retail in-line while international had some soft spots. Importantly, the massive beat on the margins/EPS and healthy profitability outlook going forward will be a major positive that investors will focus on when digesting results. In a nutshell, after the Facebook debacle last night we believe the Street will be somewhat relieved to see Amazon deliver another strong quarter as the secular tailwinds on both the consumer and enterprise fronts are massive for Bezos & Co. going forward.”

He continued: “The profitability trajectory appears to be accelerating quicker than expected which given the leverage in the Amazon model is a “potential game changer” that could translate into further multiple expansion. We look forward to hearing more details on the call around the consumer e-commerce dynamics, Prime membership trends, AWS strength, and the international build out.”

Macquarie

Price target: $US2,200

What we’ve been waiting on for many years is finally happening, meaningful margin expansion. At scale, the highest-margin businesses (AWS, advertising, 3P) are simply growing so fast that AMZN is either not able or not willing to reinvest enough to offset the margin expansion, analyst Benjamin Schachter said. “This has been the bull thesis for years.”

He added: “We suspect, though this is admittedly speculation, that AMZN will have to re-enter the phone market either directly or indirectly in order to drive Alexa adoption. We don’t see how Alexa can evolve to its fullest potential without being available prominently on the main device that so many people carry everywhere, the smartphone.”

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