Amazon's profit and revenue surge sweeps away doubts

  • TECH
  • Tuesday, 03 May 2016

Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016. REUTERS/Mike Segar/File Photo Inc's shares jumped in early trading on April 29, a day after the company reported profit and revenue that swept away analysts' estimates along with doubts about the online retailer's investment spree. 

"It's all just working," JP Morgan analysts wrote in a research note. 

"While it's tempting to try to pull out each component of AMZN’s strong 1Q (and generally recent) performance, we think it's the combination of many factors – the 'AMZN Flywheel', Prime, a growing distribution footprint, getting closer to customers, 3P (third party), AWS … the list goes on." 

The "Amazon Flywheel" refers to founder Jeff Bezos' strategy of offering the biggest selection of goods at the lowest prices and providing the best customer experience to create a "positive feedback loop". 

Amazon is also known for making bold investments in new business areas even at the expense of profits – a strategy that is often criticised by investors. 

There was little criticism this time, though. 

"We believe these results are further evidence that Amazon's investment in infrastructure, logistics, and Web services is accelerating market share gains, cash flow growth and continued high returns on invested capital," Goldman Sachs analysts wrote in a client note. 

Goldman, which has a "buy" rating on Amazon, raised its price target to US$800 (RM3,143) from US$720 (RM2,828). 

Amazon's stock rose as much as 12% to US$669.98 (RM2,632.35) in morning trading. 

Revenue in Amazon's three main businesses – online retailing in North America, international online retailing, and cloud business Amazon Web Services (AWS) – swelled 27%, 26% and 64% respectively. 

The company also offered a bright outlook, with revenue guidance for the current quarter of US$28bil (RM110.08bil) to US$30.5bil (RM119.88bil), compared with the US$28.33bil (RM111.35bil) analysts expected. 

AWS, launched 10 years ago, delivered more profit in the first quarter than Amazon's retail business. 

While AWS is Amazon's fastest-growing business, Amazon Prime and Marketplace, where the company acts as a middleman for third-party vendors, are also gaining momentum. 

"On the retail side, Prime is the driver," wrote Macquarie Research analyst Ben Schachter, who raised his target to US$760 (RM2,987) from US$725 (RM2,849) while maintaining an "outperform" rating. 

Prime time 

Amazon's Prime loyalty program offers one-hour delivery, original TV programming and access to digital entertainment products such as Prime Music and Prime Video for an annual US$99 (RM389). 

"In both North America and International, Prime continues to thrive and we believe continued investment in original content, expansion in existing markets and the still-large opportunity to add new markets offers lots of runway," BMO Capital Markets analysts Daniel Salmon and William Lowden wrote. 

BMO, which maintained its "outperform" rating on the stock, raised its price target to US$800 (RM3,144) from US$700 (RM2,751). 

At least 22 brokerages raised their price targets, to a median of US$777.50 (RM3,056). JP Morgan was the most bullish with a target of US$915 (RM3,596), an increase from US$822 (RM3,230). 

At that price, Amazon would be valued at US$432bil (RM1.69tril), making it the third-largest US-listed company by market value, behind Apple Inc and Google parent Alphabet Inc, both of which posted disappointing quarterly results. 

At current prices, Amazon is valued at about US$317bil (RM1.24tril), up about US$35bil (RM137.55bil) from Thursday's close. 

Amazon shares, which have gained 40% in the past year, trade at 98.7 times forward earnings, indicating that investors see huge potential for more growth. Apple trades at 10.8 times earnings, while Alphabet trades at 19.9 times. 

However, to justify Amazon's current share price, Amazon's earnings per share will have to grow at a compound annual growth rate of 90% over the next five years, according to StarMine. Such abnormally high growth rates have proven to be difficult to sustain over long periods. 

Of the 44 analysts covering the stock, 39 rate it "buy" or higher and five "hold", according to Thomson Reuters data. — Reuters

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