Amazon (NASDAQ:AMZN) will release its Q2 2013 earnings on July 25th. The company expects to report revenues between $14.5 billion to $16.2 billion, implying a growth of somewhere between 13% and 26% over the second quarter of 2012.  This reflects a seasonal decline against $16 billion in revenues that it reported in Q1 2013. Growth in global e-commerce volumes, Kindle shipments and higher digital content sell through will drive Amazon’s results.
Last quarter, the company registered growth of 22% which was primarily driven by its services segment that saw its sales jump by 45%.  Electronics and other general merchandise also reported strong sales, and we expect the second quarter to be no different except for the seasonality. The company’s margins improved in Q1 due to success of services segment which includes Amazon Web Services business. This business provides start-ups and big corporate clients with data centers, computers and bandwidth which can be rented to support online activities. The aggressive ongoing price war between Google (NASDAQ:GOOG), Microsoft (NASDAQ:AMZN) and Amazon for the prices of these services suggests that the company enjoys considerable margins on these services. We believe that the growing popularity of these services will mitigate the negative impact of the costs associated with fulfillment centers that Amazon is opening to speed up the delivery of physical goods to customers.
Let’s take a look at some key growth drivers that will govern Amazon’s Q2 2013 results.
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Growth In E-Commerce Market
Market research firm Forrester expects U.S. online retail sales to grow rapidly and take market share away from physical stores. This is clearly evident from the comparison of Amazon’s growth with that of traditional brick-and-mortar retailers such as Wal-Mart (NYSE:WMT), Costco (NASDAQ:COST), Target (NYSE:TGT) and Best Buy (NYSE:BBY). Forrester further predicts that the U.S. online retail market will reach $262 billion in 2013, registering 13% growth over 2012. 
Although the online channel still accounts for just 8% of total retail sales in the U.S., the future growth potential is huge and Amazon will help lead the way. This growth will be further complemented by traditional stores investing in web businesses to support a multichannel strategy as well as the global adoption of Internet and mobile devices. The research firm forecasts a compounded annual growth rate (CAGR) of 9% for the next 5 years. Another market research firm eMarketer forecasts U.S. retail sales to grow at a CAGR of 14% over the next few years, increasing from an estimated $225 billion in 2012 to close to $434 billion in 2017. 
While the U.S. growth outlook certainly looks promising, international markets can offer even higher potential in the long term. A lot of growth for Amazon will come from these markets where its presence is low. According to eMarketer, B2C (business to consumer) e-commerce sales in the Asia-Pacific region grew by more than 33% in 2012, amounting to $332 billion.  The figure is expected to grow by more than 30% this year amounting to $433 billion and accounting for more than one-third of the global B2C e-commerce sales. 
Growth In Kindle Shipments Will Attract More Online Traffic
The growing popularity of Android devices can help Amazon promote its Kindle Fire device range. These devices can help the company capture a major share of Internet traffic as the traffic’s source shifts from desktops to mobile devices such as tablets and smartphones. Amazon launched a revamped range of Kindle devices with features closely matching those of tablet device pioneer Apple’s iPad in September 2012.
An estimated 200 million tablets have been shipped worldwide since 2009 and another 1 billion are predicted to ship over the next five years. Market intelligence firm ABI Research estimates that 22% of the U.S. tablet users spend $50 or more per month and 9% spend $100 or more – much higher than the spending levels observed for smartphone users.  The growing popularity of Amazon’s Kindle Fire range could mean that a major share of this spending will be re-directed to Amazon’s online storefronts. Since Kindle devices are optimized to run on Amazon’s services, we expect them to drive greater adoption of Amazon’s services. We believe that the content business comprising eBooks and movie/music streaming will be the biggest gainer from the trend.
Our price estimate for Amazon stands at $241, implying a discount of about 20% to the market.Notes:
- Amazon’s Q1 2013 Earnings Transcript [↩]
- Amazon’s SEC Filings [↩]
- US Online Retail Forecast, 2012 To 2017, Forrester Research, March 13 2013 [↩]
- US Retail Ecommerce Outlook—What’s Driving Growth?, eMarketer, Apr 18 2013 [↩] [↩]
- Ecommerce Sales Topped $1 Trillion for First Time in 2012, eMarketer, Feb 5 2013 [↩]
- U.S. Consumer Tablet On-device Spending Soars with 22% of Users Spending More Than $50 per Month, ABI Reasearch, January 2013 [↩]