AMZN some aws numbers
2Q Summary and thoughts on the stock
2Q results were excellent with revenue/EPS upside, accelerating global EGM growth, AWS growth and gross profit growth, and better than expected N. America segment margins. Amazon reported revenue/GAAP EPS of $23.18bn/$0.19 vs. Street at $22.39bn/ ($0.14). Total revenue grew 27% y/y ex-FX, a 5 point acceleration vs. 22% in 1Q off a 110bps easier y/y comp. N. America EGM was stable at 31% vs. 31% in 1Q while Intl. GMV accelerated 6 points to 10% on an easier Japan comp. Also, AWS revenue was $1.82bn vs. our $1.61bn estimate and growth accelerated to 81% vs. 49% in 1Q. Gross margin of 34.5% was above our 33.1% estimate (35% y/y gross profit growth), and CSOI margin of 4.6% was above our 2.7% estimate aided by AWS. Total GAAP operating profit of $464mn beat our $1mn estimate.
We now expect 2015 revenue growth of 19% y/y and gross profit growth of 34% y/y, impressive given Amazon’s scale at $100bn+ in revenue. We now expect 2015 and 2016 AWS revenue of $7.8bn (+69% y/y) and $12.1bn (+54% y/y) and expect AWS to contribute 150-180bps per year to gross margins in 2016-2017. The only negatives we saw in results was acceleration in hiring (headcount up 38%) and q/q capex, which could be leading indicators of future margin pressure.
A risk going forward is the potential for an AWS price cut at the AWS re: Invent conference in October given that AWS segment margins were ~23% prior to the 2Q14 price cut. Our model assumes a 10-15% price cut in the Fall that impacts 4Q AWS revenue growth. Also, strong YTD results are driving the valuation multiple higher, which adds risk. However, we continue to like Amazon for the 2H given: 1) Prime traction to drive strong N. America EGM rev. into the holidays; 2) AWS revenue and margin strength to drive potentially higher multiples; 3) potential margin upside from AWS, 3P mix and fulfillment efficiency.
We are increasing our PO to $620 (from $535). Our SOP methodology values the AWS business at $173 per share based on 7.0x 2016E AWS revenue of $12.1bn and the retail business at $447 per share based on 1.05x our 2016E gross merchandise value (GMV) estimate of $207bn. We increased our AWS multiple from 6.5x to 7.0x given accelerating AWS trends. Our 7.0x AWS multiple is a slight premium to a SaaS comp group at 6.5x which we think is justified by higher growth (we cannot think of any $7bn companies growing at 80%+). We also increased our retail multiple from 0.95x to 1.05x (retail comps at 0.95x) given accelerating global EGM trends. If we assume a $173/share AWS value, the remainder of AMZN’s retail and advertising businesses would now trade at 0.92x 2016E P/GMV vs an average retail P/S at ~0.95x at the after-hour price of $565.. If we were to assume a 20x multiple on Amazon AWS EBITDA (closer to SaaS multiples), and a 1.05x multiple on our 2016 GMV estimate, we would get closer to a $700/share valuation.
Our $620 PO implies 2.3x 2016E sales, a multiple above the high end of Amazon's historical range of 0.8-2.1x. We would argue the historical P/S multiple should be increasing given positive third party sales (3P) that is reported on a net basis, a higher AWS revenue contribution, and record gross profit margins. Slower growth today vs Amazon’s history for the retail business would be a fair pushback on using a higher P/S multiples.
