Will Amazon Deliver A Beat In Q2?

Amazon (NASDAQ:AMZN) is scheduled to release its earnings for the second quarter of 2015 on Thursday, July 23rd. ^[1] With the company’s stock rising by more than 50% during 2015, helped by positive earnings surprises during the past two quarters, market participants will be keen to track the earning results in the second quarter. We believe Amazon will report strong growth in top-line during the quarter, on the back of heavy growth in the North American region, and in the Amazon Web Services and electronics and general merchandise businesses. However, its performance on margins will be the key highlight of the quarterly earnings, as analysts are curious to see whether Amazon will be able to repeat its strong margin results (that have been reported in the recent past) during the second quarter. We anticipate growth in gross profit to buttress margin results for Amazon in Q2 2015.

See our complete analysis for Amazon

North American And Amazon Web Services Businesses Could Drive Earnings During The Second Quarter

Amazon’s earnings results in the prior two quarters, were driven by solid performance across the North American and Amazon Web Services (AWS) businesses. We believe this trend continued in the second quarter of 2015 as well. We expect strong growth in the North American region was fuelled by high demand in the electronics and general merchandise (EGM) category. According to ChannelAdvisor, Amazon’s same-store sales during the months of April, May and June 2015 were seen at 22.6%, 23.8% and 26.0% respectively. This represented above-par performance as compared to the broader e-commerce growth rate of 15%. ^[2]

We also expect high growth within the AWS segment to come on top of solid growth in usage of these cloud services. Usage growth (in volume terms) was noted at around 90% during the past few quarters within this business. Longer-term, we see AWS as a key driver for Amazon’s stock, where annual revenue could grow 3x to over $15 billion in the long-run (by 2019), supporting increased stability in margins. Hence, we estimate that the AWS business comprises 22.5% of our valuation for the company’s stock.

Margin Performance Will Be Another Key Highlight Of The Earnings

A key factor that has driven Amazon’s stock price during 2015 has been its strong margin performance, which has exceeded market expectations for the past two quarters. Improvement in the North American operating margins, which were seen at 4.2% and 3.9% in Q4 2014 and Q1 2015, was responsible for these earnings. Additionally, improvement in gross profit — which more than offset an increase in fulfillment, marketing, technology and content, and general and administrative expenses — drove profitability during Q1 2015.

Though Amazon’s management guided to operating income in the range of -$500 million and +$50 million for Q2 2015, we are keen to assess Amazon’s margins during this quarter, as it could impact our rationale for the company’s long-term forecasts.

International And Media Sales Will Also Be Keenly Tracked

We are also curious to see the results within the international region and media category in Q2 2015, as these have somewhat under-performed in the recent past. We expect the sales growth to accelerate in the international segment, on the back of softer year-over-year comparisons. However, the segment could continue to see operating losses during the quarter, due to FX-headwinds and high investments in several geographies such as India and China.

Our $360 price estimate for the company’s stock, represent more than 20% downside to the current market price, as we believe the market seems to have already priced in most of the growth opportunities present in Amazon’s stock.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

1. Amazon.com to Webcast Second Quarter 2015 Financial Results Conference Call, Amazon Investor Relations, July 9 2015 [↩]
2. June 2015 ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Google Shopping/PLA, CSE, Search and other e-commerce channels, ChannelAdvisor, July 7, 2015 [↩]