Here Are The 3 Things Wall Street Doesn't Respect About Amazon

MKM Partners expect an in-line to better quarter from Amazon.com, Inc. AMZN and anticipates a guide up, especially on operating margin.

Amazon is set to release its third quarter results on Thursday. MKM projects EPS of $0.65 on revenue of $32.576 billion.

The brokerage, which has a Buy rating and $995 price target, believes the Street is underestimating the margin lift from expanding contribution from FBA (Fulfillment by Amazon (FBA)), international e-commerce growth and AWS margin.

FBA

More merchants are coming to Amazon’s fulfillment on increased adoption of Prime services, while FBA is boosting margins along with 3P units and advertising growth.

“We estimate that FBA units have accelerated to 65% growth in the most recent quarter,” analyst Rob Sanderson wrote in a note.

E-Commerce

Sanderson also estimates e-commerce gross margin has increased by 650bps from 1H’13 to 1H’16. Consensus estimates only imply a 110bps y/y increase in eCommerce gross margin for the fourth quarter, the key quarter for all online retailers due to the holiday shopping period.

The analyst also thinks Street estimates are “too low” for international e-commerce growth, which has gathered steam on Prime momentum. Consensus for international reflects deceleration back to mid-teens over the next four quarters.

AWS

Further, Sanderson also sees potential upside in margin of Amazon Web Services (AWS) amid conservative Street estimates of 27.3 percent operating margin for AWS in the third quarter.

“The margin on incremental revenue has been 44.5% to 46% for each of the past four quarters. Consensus suggests that incremental AWS revenue will carry margins of just 32% this quarter and 31% in Q4. We think this is conservative and are looking for upside to this very important metric,” Sanderson highlighted.

Looking ahead, Sanderson expects Amazon to guide a very strong outlook for the holidays.

Shares of Amazon are up 11 percent since its last quarterly report.