Amazon Earnings Preview: New Initiatives in Focus
Amazon (NASDAQ:AMZN) is due to announce its Q2 earnings on Tuesday (7/26). In Q1 2011, Amazon’s revenues grew across divisions and geographies, primarily on the back of several new product and service launches such as Amazon.de in Germany, discounted Kindle units, Kindle library lending, Appstore for Android, etc. Despite the top line growth, net income declined 32% because of higher shipping, marketing and technology costs. In Q2, we believe that an improving global economic environment and Amazon’s continued focus on offering new services and products will help the company continue its revenue growth across sectors. Most of Amazon’s value comes from its traditional online retail sales, in which it competes with other large corporations like eBay (NASDAQ:EBAY), Overstock.com (NASDAQ:OSTK) and Wal-Mart (NYSE:WMT).
We currently have a price estimate of $199 for Amazon’s stock, about 5% below market price.
Innovation keeps rolling at Amazon in Q2
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Through Q2 2011, Amazon has continued focusing upon new products and services. It launched Amazon Cloud Drive for the web with unlimited space for music and free storage for all MP3s purchased at Amazon MP3 as well as Amazon Cloud Player for the web, Android and the iPad. Amazon web services introduced new database services for Oracle with pay-as-you-go hourly pricing. These will help Amazon expand revenues from cloud and other web services.
Amazon launched several new products in Q2 including a discounted Kindle and Kindle 3G, a Kindle app for Android based tablet computers were launched in Q2, which will drive Kindle unit sales volumes. Amazon started print-on-demand service for books in Japan and opened a Kindle store in Germany, which will boost Amazon’s market share of international books sold.
It opened new fulfillment services centers and expanded many existing ones. This will help improve customer experience resulting in increased sales. Also, it announced MYHABIT.COM, a private sale site featuring hand-picked styles from top designer and boutique brands.
We expect these new services and products will offer many new avenues for Amazon to push its products to its users. Also, Amazon will be able to increase its sales volumes by selling more books, music, electronics and other merchandise to users through new platforms. Along with the above mentioned new products and services, we expect that improving global economic environment will help Amazon grow its top-line in Q2 2011.
Cost increases likely to keep pace with revenue growth
But Amazon is likely to see its shipping costs increase because of its expansion of fulfillment services centers. Also technology costs will increase because of investment in continued innovation in existing products and in developing new products. Marketing costs will increase as Amazon works on pushing its existing products as well new products and services to customers. Together these costs increases might compress its margins in Q2 2011.
You can drag the trend lines in the modifiable charts above to see the impact of these trends on Amazon’s stock value.