Can Amazon Remain Immune to Mother Nature?

NEW YORK (TheStreet) -- Amazon (AMZN) reports first-quarter earnings tonight after the close, and investors will be looking forward to hear if the weather impacted the company's results, as it did with other retailers and e-commerce partner UPS (UPS), or if Amazon remained immune to Mother Nature.

In issuing its press release to announce first-quarter results, UPS blamed the harsh weather around the country, noting that it disrupted deliveries and impacted expenses. Given the close relationship UPS and Amazon have, this will be worth watching, notes JMP Securities analyst Ronald Josey. "We expect Amazon to report 1Q14 results that are in line with our projections although a colder winter, particularly in the Northeast, could have helped domestic eCommerce trends and we note our checks suggest improving eCommerce trends throughout the quarter, of which Amazon likely benefited." Josey rates shares "market perform."

Analysts surveyed by Thomson Reuters are expecting Amazon to earn 23 cents a share on $19.4 billion in revenue for the quarter. Analysts surveyed by Estimize are expecting Amazon to earn 25 cents a share on $19.63 billion in sales.

When Amazon issued first-quarter guidance after releasing fourth-quarter earnings, it gave a net sales range between $18.2 billion and $19.9 billion, growing between 13% and 24%, compared with first quarter 2013. Amazon also said it expects operating income to be breakeven, plus or minus $200 million.

Investors will be looking to see whether Amazon's faster growing product lines, including digital media sales and apparel, will continue to trend upward. Goldman Sachs analyst Heath Terry, who rates Amazon "buy" with a $430 price target, believes that these two segments will allow revenue to reaccelerate, despite a slowdown in paid unit growth.

"With investor focus on paid unit growth deceleration in recent quarters and the reportedly slower start to 1Q, we believe investor expectations are modest," Terry wrote in the note. "However, with mix shifting to faster growing product lines like apparel and digital goods, continued acceleration in AWS, and a slight benefit from FX, we believe revenue growth could accelerate to 22% yoy vs. 20% in 4Q."

CEO Scott Wingo of ChannelAdvisor (ECOM), which reports same-store-sales (SSS) for both Amazon and eBay (EBAY), notes Amazon averaged 21.1% year-over-year growth, according to its SSS data. He notes the three key metrics he's watching are active users, the Electronics and General Merchandize (EGM) category, and sold-item growth.

This is the first quarter following the Amazon Prime price hike, after Amazon announced in mid-March that it was raising the price of Prime to $99 a year, up from $79.

Josey isn't looking for much in the way of revenue, but notes he will be looking to hear whether the price increase, which went into effect April 17 in the U.S., but was raised in February in the U.K. and Germany, impacted user numbers. In his letter to shareholders, CEO Jeffrey Bezos, according to Josey, noted that "adoption of Prime Instant Video in the UK and in Germany has been 'terrific' and that it was 'surpassing expectation,' which we believe is a positive early sign of streaming video adoption internationally as we await a rebound in international media revenue growth." It's unclear exactly how many Prime members there are around the world, but it's thought that there are around 20 million, a group characterized as among Amazon's most lucrative customers. "We believe there are ~15-20 million Prime members in the U.S. and that these users spend ~3-5x on Amazon when compared to non-Prime members," Josey wrote in the note.

Amazon Web Services (AWS) likely helped results during the quarter substantially, given that Amazon's cloud computing engine has successfully become part of the infrastructure on which much of the Internet is built. Goldman's Terry believes AWS "revenue growth continued to accelerate into 1Q pushing North American other revenue +53% in 1Q vs. 52% in 4Q." On a sum-of-the-parts basis, Terry believes AWS is worth $37 billion of Amazon's roughly $220 billion market cap, making it an invaluable piece to the Seattle-based company.

Much is always made about Amazon's razor thin operating margins, and that's not expected to change any time, as Amazon continues to reinvest profits into new initiatives, like the recently announced Fire TV, or the just-announced deal with Time Warner's (TWX) HBO to bring certain HBO content to Amazon Prime.
Cantor Fitzgerald analyst Youssef Squali is expecting the first-quarter operating margin will be 0.5%, down 60 basis points year-over-year, as Amazon continues to invest in the business. "While we expect 2014 operating margins to remain under pressure from continued focus on investments (more fulfillment centers, expansion of Amazon Fresh, growing video content, etc.) as well as recent price cuts on AWS, this should be partly offset by the $20 hike to Prime membership fee," Squali wrote in the note. "For 2Q:14, current consensus stands at $19.02B (+21.1% Y/Y) for revenue and 1.1% for GAAP operating margin (+60bps Y/Y)." He rates shares "buy" with a $415 price target.

Amazon has been exceptionally busy in recent weeks, launching several new initiatives that were not included in the first-quarter, so Wall Street will be looking to see if Amazon provides any guidance on these launches.

Though the Fire TV was launched earlier this month, it looks as if it's already off to a great start, as the second most popular item in Electronics, behind Google's Chromecast on Amazon among streaming devices, with Apple TV coming in seventh.

Following the HBO announcement, Wedbush Securities analyst Michael Pachter noted this could make Amazon Prime more appealing than Netflix (NFLX), given the breadth and scope of the deal. "We believe the HBO deal positions Prime Instant Video as a viable competitor and potentially more appealing alternative to Netflix," Pachter wrote in a note to clients following the announcement. "Through the HBO deal, in addition to its own original content, Amazon has the potential to offer close to seventy different series that we believe HBO owns outright, with multiple seasons available for the more successful shows. In comparison, we believe that Netflix's original series figure is closer to ten, with up to only two seasons available."

Pachter, who rates Amazon shares "neutral" with a $330 price target, is expecting Amazon to earn 17 cents a share on $19.52 billion in revenue.

Wednesday, Amazon unveiled Prime Pantry Online, which Amazon describes as a place to take advantage of "Low-priced essentials in everyday sizes, delivered to your home."

-- Written by Chris Ciaccia in New York

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