Amazon.com, Inc. (NASDAQ:AMZN) reports 1Q on Thursday, 4/27 after the close. Bank of America Merrill Lynch expects a solid retail quarter (stable 24% unit growth with 4Q) and some deceleration in AWS (to 43% y/y) and is broadly in-line with the Street on rev/EPS at $35.3bn/$2.34 vs. Street at $35.3bn/$2.28. Key topics for the quarter include: the pace of investments through 2017, AWS growth and margins given Dec. price cuts, renewed Walmart competition, and new initiatives such as offline stores, content spend, and the advertising opportunity. For the stock to move higher on results, the firm thinks the Street needs to see stable to accelerating retail trends, only modest AWS deceleration (<6 pts=""><6 pts), and continued optimism on advertising.
With an influx of ads on Amazon.com, and positive checks from ad agencies, optimism on advertising in growing. Advertising is being driven by sponsored listings on search results and programmatic ads and contributed to 73% growth in other revenues in 2016 to $3.0bn. This is important as the retail business generated just $3.6bn in CSOI. The firm estimates over $300bn in GMV on the Amazon platform in 2017, and if it assumes AMZN can capture 2-3% of this in the form sponsored advertising on the Amazon website, Amazon’s ad business and retail margins could see a nice tailwind for several years.
For 2Q’17, the Street is at $36.8bn in rev. (+4% q/q), which BAML thinks is reasonable given historical results, but it would expect a guide of $34.1-$36.5bn based on history. The firm remains below the Street for 2Q margins. The Street cut 2Q GAAP operating income forecasts from $1.7bn prior to 4Q earnings to $1.5bn currently, and it is at $1.1bn. The firm thinks the Street continues to give Amazon a long investment leash, and Amazon will take it this year with physical stores, content, new countries, and local delivery as key initiatives.
It thinks investors may look past a profit guide weakness if the top-line trajectory remains solid. It views any pullback on conservative 2Q profit guidance as a particularly attractive buying opportunity as the firm is constructive on AMZN’s investments, and Amazon always has the option of letting AWS and advertising profitability flow through. BAML views AMZN as the most attractive long-term Internet mega cap, and maintains its $1,100 PO.