Amazon.com, Inc.'s Q4 Preview
Amazon.com, Inc. (NASDAQ:AMZN) reports on 2/2 after the close. Bank of America Merrill Lynch is slightly below on revenue and above on EPS vs. the Street. Amazon’s use of Google PLAs ads, November AWS price cuts, and weakness in select offline retailer sales (online shift?) are three key variables for the quarter. Amazon’s holiday press release data was not conclusive on 4Q spending, but highlighted several solid growth trends, including Fulfillment by Amazon (FBA) delivery growth, Alexa/Echo demand, and Amazon Business strength. While Amazon remains its top eCommerce idea for 2017, BAML is cautious into 4Q’16 results due to: 1) Historical unpredictability of 4Q; 2) Increasing revenue expectations due to offline retailer misses (share shift to online), and 3) Risk to 1Q margin outlook due to content/fulfilment ramp.
BAML has below Street margin expectations in 2017 at revenue/GAAP profit of $35.6bn/$978mn vs. the Street at $36.0bn/$1,337mn. While BAML anticipates cuts to Street 2017 profit expectations, the firm thinks the Street will view content and fulfilment investment positively and see potential for retail margin to rebound in 2018 as recent fulfilment centers better leverage fixed costs, 3P mix increases, India investment growth slows, and streaming content costs are better absorbed (Prime Video expected to launch globally in 2017). Any commentary on the border tax or COGS deductibility implications will also be important for the stock (unlikely that Amazon provides much guidance), BAML estimates that loss of imported COGS deductibility could be more than 50% dilutive to EPS.
As in the past, BAML thinks investors will quickly move past a near-term profitability miss if the top-line trajectory remains solid, retail market share is rapidly shifting to Amazon, and the Street is constructive on Amazon's investment initiatives. BAML views any downside on conservative 1Q profit guidance as a particular buying opportunity as core drivers (Prime, AWS, delivery infrastructure advantage) and new opportunities (SaaS, India, B2B, autos, apparel) remain intact. BAML views Amazon as the most attractive long-term risk/reward for Internet mega caps., and maintains its $1,125 PO.
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