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By Brendan Gilmartin

Overview

Amazon.com (AMZN) is scheduled to report 3Q 2011 earnings after the closing bell on Tuesday, October 25. Results are typically released between 4:01 and 4:10 p.m. EST. A conference call will follow at 5:00 p.m. EST.

Outliers & Strategy

  • Amazon provided the following guidance for the 3Q 2011 period back in its July earnings release:
    • Net sales are expected to be between $10.3 billion and $11.1 billion, or to grow between 36% and 47% compared with third quarter 2010. The current consensus is $10.93 billion and the high end of analyst forecasts is $11.26 bln (Source: Yahoo! Finance!).
  • Forward guidance is a critical measure for Amazon and usually impacts the ensuing trading activity. Current estimates (4Q 2011):
    • Revenues: $18.10 bln / Operating Income: $512.7 mln.
  • Last quarter, a disappointing outlook for Operating Income initially sent the shares lower.
  • While much of the attention centers on Amazon’s retail operations, an overlooked part of its business are the hosted web services & cloud-computing segments that are contributing meaningful revenue.
  • Amazon is expected to earn $0.24 per share (range is $0.14 to $0.40), down from the $0.51 in the prior year period. Given the recent strength in the share price and positive sentiment surrounding Amazon, a number above consensus appears priced in at these levels. Note the shares also received a lift following the stronger than expected profit reports from Google (GOOG).

Recent News

  • 10/07: Barclay’s Capital lowered 2012 and 2013 operating margin estimates on Amazon.com, due to concerns over the overall margin profile, but raised forecasts for Kindle Fire sales. Barron’s
  • 10/03: Stifel Nicolaus upgraded Amazon from Hold to a Buy rating, with a price target of $280, citing expectations for increased market share in retail, based on its competitive pricing. Barron’s
  • 09/29: Piper Jaffray reiterated a Buy rating on Amazon as the company opens more fulfillment centers to efficiently process orders, while maintaining its edge as the leader in global e-commerce. Benzinga.com
  • 09/28: Amazon introduced the new “Kindle Fire” tablet for $199.

Technical Overview

Amazon shares are hovering just above support near $230 (coinciding with the 20-Day SMA) after recently breaking to an all-time high of $246.71 on October 14. That would represent resistance in the event of a positive release. Should earnings disappoint, the next support level below $230 is $220, just above the 50-Day SMA near $218, with further downside risk to $205. (Chart courtesy of StockCharts.com)

Summary

Amazon shares recently spiked to all-time highs, based on its dominant market share position in e-commerce, entry into new markets, and increased adoption of the web-hosting and cloud infrastructure businesses. The company is also seen benefiting from the latest versions of the popular Kindle e-reader and Fire tablet. However, the shares now trade at over 100x trailing earnings and 2.65x sales (5-year average is 2.0x), while insider selling was elevated during the quarter – signs that the shares may be due for a pause. With that said, Amazon is under pressure to deliver strong quarterly numbers. Anything less would be seen as a disappointment to the market.

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Source: Earnings Preview For Amazon.com 3Q