Did Amazon Continue To Outperform Expectations During The Third Quarter

by Trefis Team
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Amazon (NASDAQ:AMZN) is scheduled to report its financial results for the third quarter of 2015, on Thursday, October 22nd. With the company’s stock rising by over 70% year-to-date, driven by both an acceleration in top-line growth and an improvement in profitability, investor expectations will be high for the company. We think Amazon could continue to record strong sales growth during the third quarter, fueled by high growth in the care North American and Amazon Web Services businesses. And in terms of bottom-line results, we think the company could see some pressure, due to losses in international geographies, and increased investments in preparation of the fourth quarter (which accounts for almost one-third of the annual sales).

See our complete analysis for Amazon

Early Indications Of Same-Store-Sales Data Looks Strong

Amazon’s same-store-sales during the months of July, August and September 2015 came in at 30.1%, 24.7% and 19.2% respectively, according to data by ChannelAdvisor. [1] This represented above-par performance as compared to the broader e-commerce growth rate of 15% (as per comScore). We believe this growth was driven by both the Prime program as well as strong performance in the electronics and general merchandise (EGM) category.

Expecting Strong Growth Within The North American And Amazon Web Services Businesses

The net sales growth within the North American region had accelerated from 24% in Q1 2015 to 26% in Q2 2015. This was driven by more than 30% year-over-year increase in the EGM category. As per early indications, we expect Amazon to report strong sales growth from this region during the third quarter as well.

Further, the rapid growth in the Amazon Web Services business likely continued to drive the overall performance of the company during the third quarter, in our view. During Q2 2015, the segment had seen 81% top-line growth year to year, coupled with a 1,370 basis points increase in operating margin across the same interval. Owing to the massive market opportunity in the cloud-services business, we believe Amazon will continue to see usage growth of over-50% in this segment over the next few quarters.

Margin Performance Will Be Keenly Tracked Within The Earnings Report

While Amazon’s margins had disappointed during the first three quarters of 2014, the company’s margin performance over the past three quarters has exceeded expectations. During the last quarterly results, Amazon’s operating margin grew by 210 basis points year to year  to 2.0%, spurred by superior margin performance in the North American and the Amazon Web Services segments. This improvement came despite the fact that the company continues to spend heavily on its Prime and other growth initiatives, even as it incurs losses in its foreign operations.

We are keen to track the margin results from Amazon during the third quarter, and these could impact our estimates for EBITDA margin over our forecast period. We believe that losses from international operations and heightened investments  for the holiday quarter will both weigh on the profitability during Q3 2015.

Our $503 price estimate for the company’s stock represents near 10% downside to the current market price.

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Notes:
  1. September 2015 ChannelAdvisor Same Store Sales (SSS) for eBay, Amazon, Google Shopping/PLA, CSE, Search and other e-commerce channels., ChannelAdvisor, October 8, 2015 []
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