Amazon’s Earnings Blow Wall Street Away
Amazon.com Inc. shares are on fire this morning, up more than 20% to $580.57 in the first minutes of trading after the company posted a surprising second-quarter profit of $92 million. Wall Street seems excited not only about that profit, but about the promising results at Amazon Web Services and the prospects for its Prime service to boost sales.
In fact, for the first time, Amazon is now worth more than brick-and-mortar giant Wal-Mart Stores Inc.
Several analysts pointed excitedly to the idea that the main buying premise behind Amazon shares may finally be about to pay off. That’s the idea that the company has been spending prolifically to build a platform, and once all the pieces are in place, they’ll flip a proverbial switch and the profits will start rolling in. Judging from what we’re seeing out of the Street this morning, a number of analysts believe that flip is close at hand.
Here’s what the Street had to say:
– Daniel Kurnos, Benchmark (buy, price target: $650): Amazon reported blowout second-quarter results, with revenue exceeding consensus by nearly $800 million and, perhaps more importantly, GAAP operating income coming in nearly 10x the street forecast. The upside was primarily driven by a material acceleration in AWS growth.
We do expect to see some renewed heavy investment in the third quarter ahead of the all-important holiday quarter, but, with the understanding that it may be difficult to chase the stock at current levels following the recent run, we see momentum carrying through the end of the year and into 2016.
– Youssef Squali, Cantor Fitzgerald (buy, $670): Amazon delivered exceptionally strong second-quarter results, exceeding Street expectations across all key metrics, with an impressive re-acceleration in the top line across North America and International and driving better-than-expected EPS. Amazon Web Services was particularly robust. While impossible to know for certain, we believe that Amazon is now starting to move away from the heavy build years for its e-commerce business just as its top line accelerates, yielding the beginnings of the much sought-after margin leverage. If sustained, we believe this trend could lead to EPS outperformance for several years to come.
– Doug Anmuth, J.P. Morgan (overweight, $710): We believe Amazon is now reaping the benefits of its recently heavy investments in Prime, category expansion, and fulfillment centers while also being more selective on new investments. As shown in Amazon’s better than expected third-quarter guidance, the company has strong momentum heading into the back half with Prime Day success and still favorable comps related to Japan and [Amazon Web Services] a year ago.
– Robert Drbul, Nomura (buy, $700): ”Christmas in July.” We believe that the benefits of Prime are beginning to show meaningfully in the company’s results, as members continue to post higher conversion and retention rates. While we believe opportunity exists for further membership growth domestically, we see the continued international adoption of Prime as a huge opportunity for the company and believe mgmt. is committed to increasing the Prime offering overseas. Additionally, we continue to view Amazon Web Servies as another large opportunity for the company given our expectations for continued expansion abroad and further benefits from efficiency gains.
– Michael Pachter, Wedbush (outperform, $700): While guidance presents a wide range, we think Prime Day and AWS profitability will drive third-quarter results to at least the high-end of the guided ranges. The company provided third-quarter guidance for net sales of $23.3 – 25.5 billion, implying growth of 13 – 24% over the third-quarter 2014, an operating income (loss) of $(480) – 70 million compared with an operating loss of $544 million in third-quarter 2014, and stock-based compensation and amortization of intangible assets of $580 million. We are raising our estimates to reflect a faster ramp in AWS profitability and more rapid retail sales growth than we expected previously. We are increasing our fiscal 2015 revenue estimate to $107 billion from $105 billion, and our EPS estimate to $1.36 from $0.59 to reflect second-quarter results and the high-end of third-quarter guidance given recent performance.
– James Cakmak, Monness Crespi Hardt (buy, $615): As expected Amazon beats, but degree of upside is the surprise. There are few holes, if any, to poke in this quarter. Revenue was up 19.9% to $23.2 billion, surpassing our $22.2 billion estimate and consensus of $22.4 billion. On a constant currency basis, revenue was up 27%, accelerating from last year’s and the first quarter’s 22%. The top-line was fueled by growth of 25.5% to $13.8 billion (ex-forex, 26%) in North America and 3.1% to $7.6 billion (ex-forex, 22%) internationally.
We continue to see a path to an 8% margin in North America and international retail and 30% in Amazon Web Services. Although North America stands at just 5% today and international at breakeven, high-single-digit incremental margins across the retail channel, growth in higher margin categories such as apparel, and the momentum in global Prime adoption reinforces our positive outlook on profits.