The retail internet giant reports tonight after the close, with analyts consensus looking for $0.17 in eps (down from $0.91 last year) on $18.25 bl in revenues (versus last year’s $12.9 bl) for expected revenue growth of 41% y/y.
Just from looking at the drop in eps, you can see how margins have gotten stepped on, and while the gross margin has remained fairly stable at 23.5% – 24%, it is AMZN’s operating margin that has fallen from 6% – 7% to 1% as of last quarter. The growth and buildout in the distribution centers is one primary reason for the eps decline, but this same buildout is also helping AMZN to continue to gain share in retail sales, and push the brick-and-mortar retailers to keep prices low.
Many of AMZN’s businesses (retail, the Cloud, Amazon Prime, etc.) have secular 30% growth rates, but the question remains how long will management continue to step on eps for the benefit of revenue growth.
I cant honestly say their strategy is wrong – AMZN is clearly going for market share at the expense of the shareholder – but at some point the shareholder starts to worry that they’ll never see theirs.
Eps estimates have been cut in half for AMZN over the last year, while revenue estimates continue to increase, which is a good sign.
No doubt a lot of attention will be paid to the Kindle Fire sales tonight. With the Fire and the expected growth of Amazon Prime, AMZN could (as one portfolio manager described to me) start to benefit from a subscription model, rather than the retail transaction model, but Prime and AWS are still in their early stages.
We sold the majority of our AMZN this morning, after a recent pop in the stock from the low $170′s to the mid $190′s. Technically the stock needs to recover $200 per share. If tonight’s report does provide the catalyst for the stock to trade over $200, then i think it will run back to its all time high near $240, but management would likely have to signal that they want the operating margin to start expanding again.
A lower risk entry point for us on the stock would be below $150, and even better at the 200 week moving average near $125. The stock is getting oversold on the weekly charts (a good sign) but i would be too nervous coming into tonight’s report with a big position. (Sorry, i’m a huge weenie…)
To conclude, longer-term great secular growth of many businesses, is being thwarted by an uber-rich valuation in terms of eps and cash-flow. I think mgmt has to tell the Street that they are backing off SG&A growth and committed to margin expansion.
(long one core AMZN position – waiting for a trade back over $200)
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