Wedbush's Pachter Previews Amazon's Q3 Earnings: Reiterates Outperform, $700 Target

• Amazon.com, Inc. AMZN shares have gained 17 percent since July 15, despite having plunged below $465 on August 24.
• Wedbush’s Michael Pachter maintained an Outperform rating on the company, with a price target of $700.
• Despite heavy spending on content, the company is likely to report revenue and profit growth for 3Q, driven by Prime Day and AWS.

Amazon is scheduled to report its Q3 results on October 22. Analyst Michael Pachter expects the company to report robust 3Q revenue, driven by a successful Prime Day and expansion in AWS, or Amazon Web Services. He added that there is upside to the revenue estimate of $25.5 billion, which is already higher than the consensus of $24.9 billion.

“Our revenue estimate reflects strong retail sales including Amazon’s successful Prime Day; we estimate contribution of at least $1.2 billion in incremental sales in a single day,” Pachter wrote. He added that the estimates for operating income and EPS are at $70 million and $0.02, respectively.

AWS is a significant part of Amazon’s business, and that “the consistent release of new products and features leads us to expect dramatic profit growth in the coming years,” the analyst noted. With a ramp up in AWS revenues, the company would witness continued expansion in gross and operating margins.

Pachter added, however, that profit growth may be subdued on account of spending on other initiatives.

In the report Wedbush noted, “Investment in Prime membership growth is costly. Amazon appears focused on continued investment in original and exclusive video programming, and Prime Music, driving content spending well above $3 billion in 2015, by our estimates.”

This investment is likely to surge by $1 billion per annum, exerting pressure on Amazon’s profit growth.

“We continue to believe that consensus earnings estimates are way too high for 2016, and caution investors to look for a reset in coming quarters,” Pachter commented.