FBA Pressures Amazon's (AMZN) Margins - Evercore ISI
Evercore ISI analyst, Ken Sena, cut Amazon's (NASDAQ: AMZN) price target to $720 as Fulfillment By Amazon increases as a percentage of overall sales pressuring margins. No change to Buy rating.
Amazon's topline was shy of the Street consensus by ~3% and margins, particularly North America, missed with Consolidated Segment Operating Income below the Street by 10%,
CFO Olsavsky stated that “Fulfillment By Amazon did put a lot of demand on our warehouses and we were full,” essentially laying the groundwork for additional fulfillment center expansion, where they currently sit at 123 (+14 in ‘15) with 23 sortation facilities (+4).
FBA units carry a mix of shipping and direct fulfillment expenses (booked gross) but these costs apply to third party revenues that are booked net. Therefore, with FBA now 50% of 3P units, up from ~41% the previous year and 3P units now 47% of total units, up from 43% in the prior year, the trend is bound to have a negative leverage effect at least optically as we move forward, separate from any push towards same day, etc.
Prime users grew 51% (+47% in the U.S.) and units accelerated to 26% y/y from 20% in the prior year (even though Prime media consumption does not count towards units given its subscription element). In other words, the strong unit growth only pushes the capacity limit that much further.
No change to Buy rating, Target price goes to $720 from $760. The price target is based on SOTP and factors a $490 / share retail valuation (down from $530) and $230 / share (or a $110B EV) in AWS valuation, which utilizes a 10-year DCF approach.
For an analyst ratings summary and ratings history on Amazon.com click here. For more ratings news on Amazon.com click here.
Shares of Amazon.com closed at $635.35 yesterday.