AWS, Digital Media in Focus Ahead of Amazon's (AMZN) Q3 Report; Investments May Crimp '15 Margins - Cowen

Cowen and Company affirms Amazon.com (Nasdaq: AMZN) at Outperform with a price target of $390 heading into the e-commerce giant's Q3 report, which is expected out after markets close on Thursday.

Analyst John Blackledge sees Amazon reporting Q3 revenue of $21.2 billion with a GAAP loss of $0.57 per share. Consensus estimates are looking for revenue of $20.84 billion and a loss of $0.74 per share. The analyst said, We forecast Gross Proft of $6.17BN, +31% y/y (29.2% gross margin), given continued cost leverage in COGS driven by rising 3P unit sales, AWS growth and shipping cost leverage given larger fulfillment network. We forecast ($346MM) in GAAP Operating Income above consensus ($431MM) and ahead of guidance of $(410MM)-(810MM).

Blackledge also noted:

3Q14 Metrics and Key Areas of Interest: Unit Growth, AWS, Digital Media

Unit growth will be in focus, which came in at 23% y/y in 2Q14 (vs. 23% in 1Q14 and 29% in 3Q13). We forecast 22% y/y growth this quarter as the drag in physical media sales (CDs, DVDs, etc), still top purchaser categories per our Cowen Internet Retail Tracker are offset by rising Apparel, Consumables and other categories purchases. Other areas of interest include Int'l, AWS, Digital Media.

3Q Setup: We Like it Long-Term, '15 Consensus EBITDA Could be Too High

AMZN's shares have underperformed this year, down 15% in the last 3 months, down 24% YTD, with shares near 52-week lows of $284 (4/14). Sentiment has been challenged given margin fatigue and overall concern about profitability and returns on incremental content spend at Prime Instant Video, China losses, investments in devices, impact of AWS price cut in April. We like AMZN's long-term prospects, but recent investments could potentially yield downside to forward consensus margin estimates (our '15 adj EBITDA estimate is 6% below consensus), which could further weigh on the stock at the print.

We view strength in the eCommerce business, growth in Prime members and rising fulfillment footprint as positives near and longer-term. The eCommerce business is healthy and gaining share of HH budgets in Apparel and Consumables (among others), in our view. Prime member growth is strong, 26MM US Prime members (+41% y/y) per our Tracker survey. The fulfillment buildout since '10 has placed AMZN closer to customers and is enabling faster delivery and entry into new verticals (like grocery $800BN US TAM).

For an analyst ratings summary and ratings history on Amazon.com click here. For more ratings news on Amazon.com click here.

Amazon.com closed at $312.97 yesterday.

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