Amazon (NASDAQ:AMZN) will release its Q1 2014 earnings on April 24. We expect the secular trend of continued consumers' shift to Internet for shopping, Amazon’s superior delivery service and strong market position in cloud services to drive its first quarter results. Like other Internet companies, Amazon’s stock has also come down in the last two months. We believe this is more of a market correction following the initial exuberance rather than an indicator of a weak future growth. We expect revenue growth in Q1 2014 to be close to 20%, accompanied by margin expansion. The growth in the company’s international business was relatively weak in the fourth quarter of 2013 and it will be interesting to see how things play out this quarter. Here is what you should watch out for.
Our price estimate for Amazon stands at $373, implying a premium of 15% to the market price.
Expect Strong Growth In The U.S., International Business Needs To Pick Up
Amazon’s size, vendor network and technological advantage make it a formidable competitor in the online retail market. This is evident from the fact that, despite crossing $75 billion in annual revenues, the company has managed to grow its sales by more than 20%. It is continually investing in delivery centers to expand its presence both in the U.S. and international markets, and has sacrificed margin growth in the process. We expect the brisk growth to continue in the first quarter of 2014, although there will be a sequential decline due to seasonality. Last quarter, the company earned around $25.60 billion in revenues, but its year-over-year growth stood below that for the first nine months of 2013. The guidance for Q1 2014 indicates that it could generate anywhere between $18.2 billion and $19.9 billion in revenues, thus implying a growth of 13% to 24%. Historically, the company has performed near the higher end of its guidance, and this quarter may not be any different.
However, we believe that its international business requires a closer look. In Q4 2013, Amazon saw its international revenues jump by only 13% compared to 26% growth in North America. This can be attributed to slow growth in media revenues. We think that as the retailer expands in emerging markets, it is likely to realize that digital sales and e-commerce are still in early stages, and year-over-year growth may not be as high as it may have initially expected.
Surging Web Services and Digital Sales
We expect operating profits to grow faster than the overall revenues. This expected improvement in profit margin will come from Amazon’s continued push in web and cloud services business. Amazon’s ambitions are large and the company wants to dominate the global e-commerce market. We believe that branching out into web services and creating its own hardware are a part of this broader strategy. The company’s web services enable cloud storage and computing for corporates and small businesses, thus creating an infrastructure to drive more data on the Internet. This fits right into Amazon’s intent of enabling an online shift of businesses and consumers, which will help it further its interests. Additionally, the web services business is hugely profitable, and the company can invest the profit from this segment to expand its core retailing business.
To Amazon’s delight, it is ahead of other competitors in the race to become one of the biggest cloud services providers in the world. The company has frequently reduced its prices in order to bag deals. As a large chunk of corporates are expected to change their technology vendors over the course of the next few years, Amazon has a distinct competitive advantage to leverage this development. Some analysts have estimated Amazon Web Services to be a $5 billion a year business with gross margins north of 90%.
Disclosure: No positions.