JPMorgan Not Surprised If Amazon AWS Needed To Accelerate Capacity Spend

• Amazon.com, Inc. AMZN shares have been heading south for a month, and have lost 6 percent since December 28.
• JPMorgan’s Doug Anmuth maintained an Overweight rating for the company, with a price target of $825.
• Although Amazon reported mixed quarterly, its topline growth continues and margins are poised to expand, Anmuth stated.

Analyst Doug Anmuth wrote, “We’d be buying the weakness in AMZN shares.” Amazon reported mixed results for the quarter, following four consecutive quarters of big beats and clean results. Anmuth added, however, that there has been no change in Amazon’s “strong topline growth trajectory” and that the company could continue to improve margin, “albeit perhaps not quite at 2014 to 2015 levels.”

AWS Q4 results included revenue at $2,405m, representing 69 percent y/y growth and 1.8 percent higher than the JPMorgan estimate. EBIT margin came in at 29 percent, up 12pp y/y and 6pp better than the JPMorgan estimate.

Management indicated that the y/y margin expansion was mostly contributed by operating efficiencies, including purchase production and purchase prices, as well as greater utilization of assets. The company reported capex of $1.3bn, which was 31 percent below the JPMorgan estimate. Amazon denied comments about capacity constraints in its AWS infrastructure.

Anmuth pointed out that AWS had launched 722 new features and services in 2015, as compared to 516 in 2014. He believes that AWS launched close to the same number of new services and features in Q415 alone, as it had done during all of 2014. The number of features in Q415 was almost double the number introduced in 2013.

“We have not heard of capacity constraints but, given the continuing growth, we wouldn’t be surprised if AWS needed to accelerate capacity spend,” the analyst wrote.