Analyst: Amazon’s Deal With HBO Promises All-New Content

Kevork Djansezian/Getty Images

Kevork Djansezian/Getty Images

Revenues were roughly in-line with expectations; however, EPS was pressured by higher operating expenses, despite gross margin improvements. Revenue was $19.3 billion, compared with our estimate of $19.5 billion and the consensus estimate of $19.3 billion. GAAP EPS was $(0.27), compared with our estimate of $(0.19), and the consensus estimate of $(0.15).

Solid revenue growth continues. Net product sales were up 20 percent year-over-year, while service revenue was up 39 percent. Due to the introduction of several new initiatives for Prime members, including Sunday delivery in 18 additional cities, we expect product sales growth to remain in the high teens for the balance of the year.

Margins will likely be pressured by the recent HBO content deal and the company’s decision to spend at least $100 million on original content in Q3, both of which presage continued expansion of the Amazon Prime Instant Video catalog. It is impossible to determine the level of Amazon’s (NASDAQ:AMZN) absolute spending on streaming content, but we believe that Amazon spent in excess of $1 billion in 2013 for streaming video rights, compared to Netflix’s (NASDAQ:NFLX) spending in excess of $2 billion.

We are increasing our FY:14 revenue estimate to $91.1 billion from $90.7 billion, and are lowering our EPS estimate to $0.62 from $1.00 to reflect Q2 results and Q3 guidance. We are increasing our FY:15 revenue estimate slightly to $110.6 billion from $110.2 billion, and maintaining our EPS estimate at $1.79. The company provided Q3:14 guidance for net sales of $19.7 – 21.5 billion, implying growth of 15 – 26 percent compared to Q3:13, operating income of $(810) – (410) million compared to $(25) million in Q3:13, and stock-based compensation and amortization of intangible assets of $410 million.

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 view that Amazon is unlikely to provide investors a roadmap for its spending plans. 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 future spending 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. 

More From Business Cheat Sheet: