Amazon.com Does the Unthinkable -- 8:50 AM EDT
To the shock of Wall Street, Amazon.com [AMZN: Nasdaq] reported, late Tuesday, Q1 results that surpassed Wall Street's expectations. The online retailer also raised its expectations for the remainder of 2002. Boosting results at Amazon.com was a calculated move to lower prices and drive sales. Productivity enhancements helped compensate for lower average selling prices and helped keep margins in tact. With life again in its books, music and video segment, we feel assured that the company has gained a sold footing in its market. Combined with an increase in 2002 estimates, we are raising our opinion on Amazon to a Buy at this time. 15% revenue growth and an expected tripling of operating income expectations, shares warrant attention at this juncture.
Revenue of $847m demonstrated a 21% increase from the $700m the firm reaped in the Q1 of 2001. Sales were also well above expectations. The average analyst estimate was for $805m, according to Thomson Financial/First Call. Leading the charge was international sales. About 60% of incremental sales year-over-year came from outside the US.
One of the most important measure of success, revenue growth in Amazon’s core books, music and video segment, also showed a strong jump. After posting a devastating 12% sales drop in its core books, music and video segment in Q3, and a 5% rise in Q4, the Amazon unit’s sales jumped 8% in its latest reported quarter. In fact, pro forma operating income for the books segment rose year-over-year. CEO Jeff Bezos credits the gain to a strategy of offering consumers lower prices. The company first lowered prices on books last July after it reached the point where it could balance growth with improvements in efficiency. Going forward, Amazon will again be lowering prices, offering a 30% discount on many books priced $15 or higher. At the same time, the company will attempt to apply the same strategy to its other divisions -- lowering prices on a variety of items such as electronics products.
Yet unlike it surprise net profit of a penny last quarter, the company’s results were in the red this quarter. Using its pro forma measure of net income, which excludes non-cash items like stock-based compensation, Amazon lost $4.8m, or $0.01 a share. Still, the loss was much narrower than the average estimate for a $0.09 per share loss.
Going forward, Amazon.com expects annual sales to grow by 15%, which is faster than the 10% growth it previously forecasted. This means Amazon expects 2002 revenue to be closer to $3.6bn. Amazon.com also expects pro forma operating income of more than $100m. This is more than three times its prior forecast of $30m. In the current quarter, Amazon expects sales to be between $765m and $815m.
Amazon’s ability to scale its business successfully is heartening given many years of criticism regarding its devastatingly high losses. As a result of a renewed operating cost structure, the company is simultaneously able to grow top and bottom line results while passing along the savings to consumers. Further growth in the global marketplace will only add to the company’s profitability. And yet while Amazon has been criticized lately for some tricky accounting , we think this quarter shows the company performed well across the board. With expectations that 2002 will be the start of great things to come, we are upgrading the shares to a Buy at this time. While we do not expect the stock to hit the levels seen in 1999, we think the shares will begin to chart a higher course from here on out.
Market Timing
From the Technical Desk
On March 6, we said: "Amazon [AMZN: Nasdaq] did not retreat to our downside target, but bounced back to extend the intermediate uptrend. At present, long-term prospects are positive, but it may face some weakness in the short-term. After meeting resistance at $16.75, look for it to decline to $12.75 in two to four weeks. "
Amazon hit our downside target of $12.75. Long-term prospects still remain bright, but we expect further consolidation for now. Look for trading between the range of $15.50 and $13. It is trading at $14.06.
Risk Tolerance ****
(* Low risk, *****High risk) |
