Amazon Earnings Can Help Stock Reach $200 Fair Value

by Trefis Team
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Amazon (NASDAQ:AMZN) will report its earnings for Q1 2012 on April 24. It had record sales in 2011, reporting a 41% increase to $48 billion. However, the operating margins were hammered due to the heavy costs it incurred on the Kindle Fire sales that were sold at near zero margins in order to boost e-commerce and digital content sales in the long term.

While the company’s adjusted EBITDA margin is expected to stay relatively low in the near future, it should eventually recover as Amazon makes up for its lost profits through digital content sales driven by the sales of the Kindle Fire. Amazon competes in the e-commerce and e-content space with companies such as eBay (NASDAQ:EBAY) and Apple (NASDAQ:AAPL).

See our full analysis for Amazon’s stock here

All eyes on media sales growth

It is nearly six months since the launch of the Kindle Fire, and we now expect significant growth in media sales as the Kindle Fire units drive digital content sales. Media sales growth was around 19% in 2011, slightly higher than the growth in 2010. We expect Amazon’s bet to start paying off in 2012, with the Q1 sales figures acting as the harbinger for the yearly sales.

Amazon continues to add content to its Kindle store, Instant Video streaming, Appstore and other digital content offerings. We will look at how effectively it is able to leverage the Kindle hardware to drive its content sales and deliver on its planned strategy.

Given the recent DoJ antitrust lawsuit against Apple and major ebook publishers, Amazon could stand to benefit from any decision against the defendants as it would help it increase its market share and control e-book pricing. We will also look for any statements related to the lawsuit during the earnings call.

Fulfillment and Web Services

Amazon recently acquired Kiva systems to further automate the warehousing process using robots. This could help Amazon increase its margins by reducing operating expenses in its core e-commerce business – electronics, general merchandise, books, etc.

Another growth area for Amazon is web services. The company is the leader in the cloud computing space with Amazon Web Services (AWS), and continues to roll out new offerings like CloudSearch and enter partnerships with Eucalyptus to increase the reach of AWS in the enterprise. We expect Web Services to see a steady increase in revenue in the coming years.

Electronics and general merchandise sales account for around 60% of Amazon’s value, while books, music & digital media sales account for 22%. Amazon Web Services account for less than 3%.

We currently have a $205 Trefis price estimate for Amazon, which stands nearly 10% above its market price.

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