Earnings Preview: Expecting Amazon to Disappoint

Amazon (AMZN) is scheduled to report third quarter 2008 results after the market closes today, Wednesday, October 22. Based on our analysis, we at eChristianInvesting are expecting AMZN to report disappointing results that miss Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $4.20 billion and EPS of $.25. This would represent a strong 30% increase in revenues from last year’s $3.26 billion in the same period. The current analyst consensus calls for revenues of $4.29 billion and $.26 EPS. On July 23, the company gave 3^rd quarter guidance for revenue of $4.200 – 4.425 billion.

While Amazon’s business continues to hum along – growing at 30% a year – the combination of three factors will lead to disappointing results this quarter.

1. Consumer confidence fell dramatically in the 3^rd quarter, as troubling economic headlines undoubtedly led to fewer purchases.

2. The strengthening dollar will hurt the top lines of businesses with large international exposure (~45% of Amazon’s revenue’s come from their international operations).

3. Strong economic headwinds will certainly cause AMZN to reduce expectations for their all-important 4^th quarter sales.

Share Performance

Amazon’s shares have been hammered this year and are now down 43% ytd. That has caused it to under-perform even the NASDAQ’s dismal 33% drop. This shows investors' strong skepticism about the company’s ability to perform in a declining economic environment.

Valuation

Shares are trading at 26x consensus 2009 EPS estimates. This still represents a healthy premium to their peer group. With the expectation for disappointing quarterly results and weak 4^th quarter guidance, the market should push these shares down further in the coming days. Therefore, we do not recommend holding Amazon shares until they reach a more compelling valuation point.

Recommendation

Sell with a $40 price target.

Disclosure: At the time this article was published, the author did not have a financial position in any of the stocks mentioned in this article.