Amazon.com, Inc. (NASDAQ:AMZN) will report on 4/27 and Piper Jaffray expects Q1 results that will be essentially in-line with Street estimates (solid retail revenue, with potential for slight miss on AWS), but Q2 margin guidance may be slightly below consensus (consistent with most investor expectations). The firm’s Amazon Search Index, which has a 0.95 correlation with reported retail unit growth, indicates that Q1'17 unit growth will be ~23%, vs. 24% in Q4'16. This would point to FXN retail revenue growth of 22-23%, which is in-line to slightly above Street expectations (consensus retail revenue is +22% y/y). The firm believes long-term investors should own AMZN through Q1'17 earnings; it does not anticipate meaningful revenue or profitability upside in the Q2'17 guide and, instead, it believes investors are braced for a below consensus guide for Q2 GAAP operating margins. The firm remains LT bulls on AMZN; reiterate OW, $1,000 PT.
Piper Jaffray’s Amazon Search Index uses a principal component regression analysis to find relationships between search term relevance growth and Amazon's global unit growth. This analysis has a 0.95 correlation over the past 36 quarters (2% mean error) and for Q1'17 indicates retail unit growth of 23% (vs. 24% in Q4'16). This level of retail unit growth suggests FXN retail revenue growth of 22%-23% vs. the Street at 22% (aka an in-line quarter).
While AWS is a quarter-to-quarter black box, investors are attuned to the Street's overly aggressive modeling of Q1 AWS revenue relative to price cuts that had one month of impact in Q4'16 (which saw 8ppts of revenue deceleration) and the full quarter of impact in Q1'17 (which the Street is modeling at only 4ppts of deceleration). The firm is modeling 7ppts of deceleration in Q1 AWS revenue growth and believes its estimate may prove closer to reality, so it could see a slight AWS revenue miss vs. consensus for Q1.
The Street is modeling for 4.0% GAAP operating margins in Q2'17 vs. the firm’s estimate for 3.0%; it believes these estimates do not fully represent the annualized impact of Amazon's investments in fulfillment, content, and competition in India. As investor, the firm is already well aware of Street mis-modeling of margins and the nature of Amazon's expenses, it believes the company will receive one more pass on margins. This will not likely be true when Amazon guides Q3'17 in July, as the company should see margin expansion in 2H'17 as they comp significantly increased investment spend in Q3'16. In other words, the lack of 2H margin expansion would lead some investors to believe the firm is at the start of a multi-year margin compression trajectory.