Amazon Is 'Finally' Delivering Substantial Earnings Growth

Following years of inconsistent profits, Amazon.com, Inc. AMZN finally delivered significant earnings growth in Q2.

Wedbush’s Michael Pachter reiterated an Outperform rating on the company, while raising the price target from $835 to $900.

Impressive Results

“The company’s outsized earnings beats in 1H:16 appear to be a signal that it is focused on growing profits,” Pachter mentioned.

AWS’ gross and operating margins have increased as revenues have continued to ramp, and the analyst expects the mixed of Fulfillment by Amazon and AWS to drive further expansion in gross margins.

Prime membership growth also continued “unabated” during 2Q. “We expect the monthly Prime subscription offering to substantially inflate the number of Prime customers seasonally, particularly around the holidays,” Pachter stated.

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However, offsetting the expansion in gross margin, the analyst expects the company to meaningfully increase spending on video content by $500 million annually for an estimated $3.0-$3.5 billion in 2016.

Gross Margin Drove Beat

Revenue came in at the high end of the guidance range and ahead of the estimate for 2Q, while the significantly higher gross margin led to another quarter of impressive results.

Operating income also meaningfully beat the estimate and the guidance, driven by gross margin expansion of 230 bps. The EPS also beat the estimate and the consensus.

Pachter raised the FY16 revenue and EPS estimates to reflect confidence in Amazon’s ability to continue to deliver incrementally higher profits. The FY17 estimates have also been raised.

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