Amazon’s Online Domination Priced In Until Margins Improve

by Trefis Team
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Amazon (NASDAQ:AMZN) reported its Q1 2012 earnings, with revenue growing to $13.18 billion, up 34% year-over-year. Most of its sales growth was contributed by great growth in sales of electronics and other general merchandise, which grew around 43% in the North American and International markets. [1] However, its operating income declined significantly due to margin pressures as it continues its aggressive expansion spree and continued to take a hit on Kindle device sales. 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

Media sales to drive revenue growth

Amazon’s Media sales, which are comprised of e-content, books, DVDs and music, grew 19% this quarter. Given Amazon’s heavy investments in the Kindle, we expect e-content sales to increase significantly going forward and drive revenue growth for Amazon. The rapidly growing smartphone and tablet user base should also help drive e-content sales directly benefiting Amazon, which is one of the leaders in the space.

Amazon web services continues to grow

Amazon Web Services was the fastest growing business of the company, but it still accounts for just a fraction of its total revenue. Going forward, we expect it to continue to grow and be the dominant cloud platform globally. New initiatives like CloudSearch and the AWS Marketplace could help drive AWS revenue growth going forward.

Margins expected to improve

Amazon has already taken the brunt of the hit to its margins due to heavy Kindle sales. We expect the margins to improve going forward, as e-content sales increase. Its recent acquisition of Kiva, and its ongoing efforts to reduce its operating expenses should also help it stem the decline in its margins, and maybe even improve them a bit.

Even a slight impact in Amazon’s margins would significantly boost its value, as Amazon currently has razor-thin margins. You can check the impact of that using this chart.

We are revising our price estimate which should be live on our site soon.

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Notes:
  1. AMAZON.COM ANNOUNCES FIRST QUARTER SALES UP 34% TO $13.18 BILLION, SEC []
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