Amazon's Soft Guidance Will Provide Investors With A Better Entry Point

Amazon.com, Inc. AMZN reported mixed results for Q4 2016, with the revenue missing the consensus by $1 billion, while operational leverage drove profitability upside, with operating income beating the consensus expectations.

Benchmark’s Dan Kurnos maintained a Buy rating on the company, while lowering the price target from $950 to $925.

Disappointing Guidance

The analyst mentioned the Q1 guidance was a little disappointing, well below the consensus forecasts at the high end of the guidance range, implying continued high incremental expenditures.

“As Amazon has historically outperformed in 1Q with margin upside, and given their track record of investing aggressively, generating positive ROI, we would the likely pullback as a buying opportunity,” Kurnos stated.

Q4 Results

For Q4, Amazon reported a 24 percent year-on-year decline in paid unit growth, missing the consensus expectations.

Results for the Electronics and Other General Merchandise (or EGM) segment was also below expectation, “implying a modest negative ASP mix-shift, or reduced volume due to promotional activity from other retailers,” the analyst explained.

On the other hand, Fulfillment by Amazon (FBA) grew at a rapid pace, representing over 55 percent of total third party units during the quarter. Kurnos believes this persisting trend could drive further fulfillment and warehouse expansion, while reducing capacity constraints for FBA.

“Amazon’s initial investment in countries such as India is already bearing fruit, and the launch of Amazon Prime in China could be a meaningful tailwind going forward if Amazon can scale their efforts in the region through accretive investment,” the analyst went on to say.

Although still in the early stages, Kurnos believes Amazon’s continued investment in initiatives, such as Prime Video, Prime Now and Echo devices could represent meaningful revenue drivers in future.