Following Q1 2019 results we increased our price target on the stock from $2,000 to $2,200. The increase in price target was mainly a result of an increase in confidence in Amazon’s ability to potentially accelerate revenue growth and reduced headwinds on global growth. We reflect this optimism by increasing our forward multiple from 42x to 44x on our 2021 earnings estimates.

Amazon reported earnings beat for Q1 19, which were better than our expectations. 1Q 2019 sales rose by 17 per cent, at the high end of the group's targeted range (10%-18%).

What impressed us the most in the results was the EBIT of $4.4bn (+129%) which was well above the guidance provided by the group ($2.3-3.3bn). As was the case last year, increased efficiencies in North America and Amazon Web Services (AWS - its cloud business) drove the growth in operating income and we expect this to continue to grow in the coming years.

AWS continues to get more profitable on a year-over-year basis. Its operating margin (operating income divided by revenue) was 28.9 per cent in the quarter, up from 25.7% in the year-ago period, though down slightly from 29.3 per cent in the fourth quarter of 2018.

We view the stock as a long-term growth story for the following reasons:

• Amazon turned in another great quarter
• AWS will remain the global cloud-computing leader
• Revenue from advertising should continue to rise
• Consumers enjoy shopping at Whole Foods supermarkets
• Amazon Prime memberships should continue to grow
• We continue to like Amazon because we strongly believe that its e-commerce and web services business (AWS) have further room to grow.
• Amazon tends to issue conservative guidance, though market is confident that second-quarter operating income will exceed 20%, being the top end of guidance. (Guidance -13%<X<20%)
• The company is investing to fuel long-term growth. Amazon plans to spend about $800 million in the second quarter on upgrading Amazon Prime's core two-day free delivery benefit to a one-day free delivery benefit

Segment breakdown

eCommerce – Amazon is the largest internet retailer in the world as measured by revenue and market capitalisation.

We believe Amazon is well positioned as the market leader in eCommerce, where it’s still early days with US eCommerce representing circa 13 per cent of adjusted retail sales (ex-gas, food, and autos), which we view as likely going to continue to increase over time.

Amazon Web Services (AWS)

AWS at the moment only accounts for 10 per cent of net sales. It offers a broad set of global cloud-based products including compute, storage, databases, analytics, networking, mobile, developer tools, management tools, IoT, security and enterprise applications.

We believe the company has much further room to grow in this business segment being the leader in the public cloud with a circa 70 per cent US market share.

High AWS profitability gives us increased confidence in the business.

Outlook

For 2Q19, the group expects sales growth of 13-20 per cent, which is a higher targeted range than that provided for 1Q19 (10%-18%). On the contrary, the EBIT guidance looks conservative with a range of $2.6-3.6bn vs the $3.0bn reported in 2Q18. We remain optimistic as the group has traditionally reported EBIT well above its targeted range over the past two years.

Valuation

Our $2,200 based on a forward multiple of 44x on our 2021 EPS estimate of $50.

Conclusion

We are comfortable holding Amazon in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.

Amazon has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead.

Disclaimer:

This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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