Analysts have fallen in love again. Unfortunately, you know what that usually means.
(And not because the analysts are stupid, by the way. Just because when everyone’s bullish, there just aren’t that many people left to buy the stock. That’s the only thing that makes a stock go up, of course–people buying it. But perhaps there are enough folks who have been petrified of the multiple who will now capitulate and run to catch the train.)
(And not that we’re complaining. We owned Amazon (AMZN) all through the dark times, so it’s great to see it approaching its old highs again.)
What could go wrong? Well, it’s expensive, for one, so if anything goes wrong, look out below. And Doug Anmuth at Barclays is the only analyst concerned about what we think could be a major issue for the company in coming years…the transition to digital media. Amazon still generates more than half of its profits from the sale of books and DVDs.
A selection of raves:
Scott Tilghman, Hudson Square:
AMAZON…BEATS CONSENSUS BY 30%
As we forecast in our preview report, Amazon’s strong revenue performance and better than expected margin performance enabled the company to handily beat consensus EPS expectations, reporting $0.41 versus our $0.38 estimate and the $0.31 consensus.
MARGINS FARED EVEN BETTER THAN WE ANTICIPATED
Operating margins rose 20 basis points Y/Y to 5.0%, benefiting from improved gross margins and lower shipping costs. We had expected a Y/Y decline due to promotional activity and mix, while the Street was 20 bps lower than us. We expect digital media, continued cost control, and mix reversals to aid gross margins going forward.
GUIDANCE QUESTIONED, LOOKS CONSERVATIVE
The tone of questions on last night’s conference call led us to believe that guidance was the key concern of investors, despite bracketing consensus and our above-consensus forecast. We believe the company’s outlook remains conservative, offering substantial downside protection rather than indicating early underperformance relative to expectations thus far in 2Q.
OUTLOOK REMAINS COMPELLING
We are raising our FY09 EPS estimate to $1.82 from $1.76, reflecting 1Q results, and lower interest expense for the balance of the year as a result of the company’s debt repayment in 1Q. We are also raising our target price to $96 from $87 primarily as a result of our belief that our equity risk premium of 7%, though appropriate in the short run, is too high to evaluate the company longer-term, especially in light of recent performance (our WACC/discount rate is 16.5%). We therefore believe Amazon shares continue to offer investors compelling value, especially since it appears Amazon is continuing to gain market share at the expense of both its ecommerce and bricks and mortar competitors.
Amazon reported solid 1Q09 results last night, with bottom line results exceeding our Street-high forecast, while beating consensus by better than 30%. Revenues also increased more than we anticipated, to $4.89 billion versus our $4.8 billion estimate, and also exceeded the $4.76 billion consensus. Margins also beat both our forecast and the Street leading to EPS upside. EPS of $0.41 beat us by $0.03 and exceeded consensus by $0.10. It appears the only concern (based on aftermarket trading and the conference call) regarding the company’s release was guidance for 2Q, which we maintain is appropriately, if not overly conservative, in out view.
The quarter’s results and the company’s outlook highlight the core tenets of our thesis. Specifically, the company should (and expects to) benefit from increasing adoption of online shopping, expansion of category selection and geographic penetration, and building FCF generation. Margin improvement is likely to remain a step function as new product introductions ramp and efficiencies of scale in those categories build. The 2Q guidance, though bracketing our above consensus forecast is, in our view, simply a matter of short-term uncertainty, demonstrating management’s conservatism during tumultuous times. As we have outlined repeatedly, while we believe near-term prospects remain challenged by uncertain and ever changing economic conditions, our focus remains long-term, with an emphasis on the company’s ability to gain both wallet and market share.
Sandeep Aggarwal, Collins Stewart
We do not see the core business momentum created by AMZN slowing down anytime soon and we are incrementally more positive newer initiatives especially Kindle and AWS.
Stephen Ju, RBC
AMZN reported another solid quarter, with the clear highlight being operating margin expansion stemming from the yearly gross margin lift and tight expense control. The global acceleration in EGM emphasises the fact that there is no such thing as Amazon same-store sales, and there lies the driver of its share gains, as the company continues with category, 3P, and eventually regional expansion.
Imran Khan, JP Morgan
Massive market share gains continue. NA revenue growth accelerated to 21%, from 18% in 4Q. This compares to our 1Q estimate of roughly flat Y/Y eCommerce growth in the US and an 11% decline in eBay US non-Vehicles GMV, demonstrating that Amazon is gaining market share rapidly. Considering Amazon has ~10% US eCommerce (including third-party seller revenue), we think opportunities remain to make further market share gains. Additionally, we expect further reacceleration of growth in US eCommerce in an economic turnaround.
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