Earnings Preview: Amazon

The Zacks Consensus estimate is currently at 56 cents per share, although analyst estimates vary between 65 cents and 91 cents. The wide variation is clearly related to revenue, which varies between $6.11 billion and $6.87 billion (Zacks Consensus $6.56 billion).

We have identified the pros and cons that could impact results this quarter.

Pros-

Analysts are by and large bullish about growth in the e-commerce market, although retail sales numbers released by the Department of Commerce for the months of May and June showed declines. Analysts believe that the e-commerce sector will grow at the expense of brick-and-mortar outfits. Moreover, given the conservative guidance provided by most, chances of positive surprises are strong.

Amazon will also gain from a very strong ebook market, which will serve as a catalyst for the shares. The Association of American Publishers project that ebook sales grew at 163% year over year in May and 207% during the first 5 months of 2010. Amazon, with a 30% market share, should benefit from this trend.

Kindle sales remain positive for the company, growing 3X since the price was lowered from $259 to $189. Additionally, its availability in Target Corp. (TGT) stores also helps.

The company has diversified its product mix, introducing six new categories internationally and one in the domestic market. This diversity is expanding the addressable market, further improving growth prospects.

Cons-

There were two main negatives that most analysts pointed out. The first was related to FX, which remains a negative according to all. Amazon generates nearly 50% of its sales from international markets, so it is highly exposed.

Additionally, there are increasing fears related to cutback in demand for consumer items, although judging from eBay Inc.'s (EBAY) results reported earlier, these fears could be overblown. However, analysts did indicate that retailers were heavily discounting consumer devices, so profit margins could be impacted.

Increasing competition from Apple Inc.'s (AAPL) iPad and Google Inc.'s (GOOG) book business is expected to erode Amazon's ebook market share, although we do not see that happening for a few more quarters at least.

Analysts also feel that a small beat would not satisfy expectations, so shares could still take a tumble. One analyst in particular mentioned a beat of 5% or more to satisfy investor sentiment.

Agreement of Analysts

As a result of these contrarian viewpoints and the serious risks mentioned, we see 2 analysts raising estimates for the quarter over the last 30 days and 6 lowering. Moreover, two analysts have raised estimates for 2010 over the last 30 days, with 9 lowering. Estimates for 2011 also show a bias to the downside with 2 analysts raising versus 10 lowering.

Magnitude

It is encouraging to note, however, that despite all these adjustments, the Zacks Consensus Estimate remains unchanged over the last 30 days for the June and September 2010 quarters, as well as for full year 2010. Estimates for 2011 are down 3 cents, though. We attribute this more to loss of ebook market share than any currency headwind. The stability of estimates indicates that average estimates for the June quarter are in fact conservative.

Recommendation

We have a Neutral recommendation and Zacks #3 Rank ('hold') on Amazon shares, indicating that we do not believe there will be significant movement in share prices. We believe any positive surprise will be in line with investor expectations.

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