Analyst: Amazon’s Prime Membership Continues to Drive Growth

Source: http://www.amazon.com/Amazon-Fire-Phone-32GB-AT/dp/B00EOE0WKQ

Amazon (NASDAQ:AMZN) will report Q2 results after the close on Thursday, July 24, and host a call to discuss results at 2:00 p.m. PT (webcast: www.amazon.com/ir).

We expect Amazon to report Q2 revenue in-line with our estimates as it continues to gain share from brick-and-mortar retailers. EPS remains unpredictable as recent hardware launches likely soaked up gross profit dollar growth. Our estimates are for revenue of $19.5 billion and EPS of $(0.19), versus consensus of $19.3 billion and $(0.15), and guidance for revenue of $18.1 –19.8 billion. We modeled operating income of $(55) million versus guidance of $(455) – (55) million, but our estimate may prove optimistic, as Amazon clearly incurred tremendous expense to launch Fire TV hardware during the quarter.

In June, Amazon introduced the Fire Phone, the company’s first entry into the smartphone market. The phone offers several exclusive features that should allow it to compete in the highly competitive smartphone market. We believe that the phone positions Amazon to collect consumer data, which will enable it to better target sales of other products. For example, if a Fire smartphone owner watches Transformers, Amazon could offer the toys, DVDs, or video games. If a customer watches documentaries on fishing, Amazon may offer rods and reels.

Amazon also introduced Prime Music during Q2:14, an unlimited, ad-free, on-demand music streaming service for Prime members. Prime Music appears uncompetitive compared to Pandora or Spotify. While we believe that the service increases the value of the Prime membership, and we expect Amazon to add to its music catalogue as it has with Prime Instant Video over time, we do not think that the initial offering is sufficient to induce subscribers of these other services to switch. Prime continues to be a driver of growth for Amazon. We estimate that there are over 25 million Prime members worldwide, and that the average Prime customer purchases 4x as much merchandise as non-Prime members.

We are maintaining our NEUTRAL rating and $330 price target. Our PT reflects a P/E multiple of 50x our hypothetical FY:19 EPS of $8.38, discounted back five years. Our rating is based on our assessment that Amazon is unlikely to provide investors with a strategy roadmap. While recent announcements have given us increased visibility into Amazon’s revenue growth, we are not convinced that the company will share sufficient details about spending plans to allow us to accurately model profit growth, and it may take time before EPS grows sufficiently to justify its share price.

Michael Pachter is an analyst at Wedbush Securities. 

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