Analyst: Amazon Unlikely to Provide ‘Strategy Road Map’

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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.  

Amazon (NASDAQ:AMZN) will report first-quarter results after the close on Thursday and host a call to discuss results at 2 p.m. Pacific Time (webcast:

We expect Amazon to report Q1 revenue in line with our above-consensus estimates as it continues to gain share from brick-and-mortar retailers; EPS remains unpredictable as the company’s spending soaks up gross profit dollar growth. Our estimates are for revenue of $19.52 billion and EPS of 17 cents, versus consensus of $19.44 billion and 24 cents, and guidance for revenue of $18.2 billion-$19.9 billion. We modeled operating income of $156 million versus guidance of $200 million, but our estimate may prove optimistic, as Amazon has consistently sacrificed near-term profitability in order to drive long-term growth.

In March, Amazon announced a price increase for Prime membership to $99 annually. The $20 increase was at the low end of the $20-$40 increase Amazon suggested during its Q4:13 conference call. The company did not specifically provide a reason for the increase when discussing it with investors earlier this year. We believe the price increase is intended to offset rising fuel costs and additional spending on streaming content commitments, among other items.

Earlier this month, Amazon introduced the Fire TV multimedia set-top box for video, music, and gaming. We thought Fire TV’s debut was underwhelming, and believe that Amazon missed an opportunity to introduce a highly differentiated device. We believe that the primary use for Fire TV will be video streaming through Hulu Plus, Netflix, and Prime Instant Video, three applications that are already available on a slew of other consumer electronics devices, including Fire TV’s primary competition.

With similar application availability and pricing for Fire TV and its competition, we remain unconvinced that buyers will opt for Fire TV at the expense of Apple and Roku, particularly among non-Amazon customers, making Fire TV another entry in an already crowded space. Several news outlets have reported that an Amazon mobile phone will be launched soon.

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 road map. 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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