KeyBanc Capital Markets thinks Amazon.com, Inc. (NASDAQ:AMZN) should post solid results despite a still tentative consumer. The Company has made a number of muscle moves in retail (Prime Wardrobe, Whole Foods, Kenmore appliances) that will serve as long-term growth drivers. FC growth in 2H16 likely pressured fulfillment expense, but revenue growth is likely similar to 1Q. For AWS, KeyBanc conversations with AWS partners suggest growth could reaccelerate in 2Q.
Despite a difficult retail environment, KeyBanc thinks Amazon continues to take market share. KeyBanc expects Amazon’s core retail products business to grow in line with last quarter at 15% y/y, and growth at third-party and subscription services should maintain a significantly faster growth rate. KeyBanc models close to 30 bps of deleverage in fulfillment services, slightly better than the 44 bps in 1Q.
AWS partners suggest growth could reaccelerate in 2Q. Favorable partner feedback on a seasonal recovery at AWS was encouraging after a sluggish 1Q, where growth slowed to the lowest levels since mid-2014. KeyBanc expects AWS revenue could reaccelerate, rising more than 10% sequentially to over $4 billion. Competition with Microsoft and Google has increased, but does not appear to be derailing AWS' strong cloud growth prospects.
In an effort to augment the Prime flywheel, AMZN continues to focus on proprietary tender. On Prime Day, Amazon offered Prime Customers a $5 Amazon.com promotional credit for purchasing at least $25 in Amazon.com gift cards. This has now continued as Amazon is now offering customers a $10 credit for reloading their gift card balance with over $100 (first-time users of the "reload" feature only). KeyBanc also thinks Amazon’s credit card offering (Amazon Chase credit card, using Amex Membership Rewards to purchase items, among others) increases customer stickiness.
Amazon is one of the most disruptive forces in retail and technology today. KeyBanc thinks it will continue to take market share and also benefit as total share accorded to e-commerce continues to grow. At 2.5x 2018 EV/ sales, KeyBanc believe valuation is full.