Financial market research and analysis

Amazon.com is the undisputed king of e-commerce but changing regulatory winds could knock it from its throne. The stock price recently received a boost after the company announced that its Prime Membership has eclipsed the 100-million-subscriber level, but the intervention of Donald Trump has increased volatility.

Headwinds from President Trump

There is a long-standing feud between the President of the United States and Amazon’s Chairman and Chief executive Jeff Bezos. Trump’s tweet attacks have generated volatility for the share price.  Amazon’s practices as they pertain to federal tax payments and local and state sales tax collections are now under the microscope.  In addition, Trump has issued an executive order aimed at the U.S. Post Office, demanding a review of their practices to make sure Amazon is not taking advantage of bulk delivery. In our view, given Amazon's multiple other shipping options, the efforts to hurt Amazon by creating a disincentive to use the post office would ultimately hurt the agency much more than it would hurt Amazon. In the short run, if Amazon’s relationship with the Post Office changes, it will disrupt the firm’s US supply chain.

Amazon's best-selling merchandise in 2017 was Amazon products, including the Fire TV Stick and Echo Dot. Alexa created a developer community that now competes with the size of Apple’s App store. Amazon's media business, including movies, TV shows, and music services, are a powerful incentive to subscribe to Prime, which enhances the company's competitive positioning relative to other online retailers. With more than 100-million prime customers, Amazon is continuing to infiltrate many different segments.

Amazon Generates Enormous Cash Flow

Amazon is a cash cow and is likely looking for more places to invest.  Cash was $31.0 billion at the end of 2017. Amazon had $25.98 billion of cash and cash-like securities at the end of 2016 and $19.9 billion at the end of 2015. Total debt was $24.7 billion at the end of 2017. Debt increased from $7.68 billion at midyear 2017, principally to pay for the acquisition of Whole Foods. Total debt at the end of 2016 was $7.69 billion. Amazon generates significant cash. Cash flow from operations was $18.4 billion in 2017. Cash flow from operations was $17.27 billion in 2016, compared to $11.92 billion in 2015.

Numbers and Guidance

The company guided Q1 2018 revenue to a range of $47.75-$50.75 billion. The $50.25 billion mid-point of the revenue range would generate sales growth of 35%. Guidance from the company on operating income is $300 million-$1.0 billion.

The average EPS estimate is $1.25 per share based on 40-analysts.  The range is from $0.66 to $1.70.  This compares to $1.48 for Q1 last year. The average revenue estimate for the Q1 is $49.88 billion, based on 40-analysts, with a range from $48.52 to $51.01. The trend in average estimates has dropped 28% over the past 90-days and less than 1% over the past 60-days. Growth estimates are for an increase of 82.5% this year and 85.5% next year.

Conclusion

There is a lot to be positive about; Amazon Web Services is a sector-leader for cloud solutions, the Kindle and Alexa products are category leaders, and the company is increasing its breadth into the food distribution sector following its purchase of Whole Foods in the summer of 2017.

We expect the pace of Prime membership growth to continue at an impressive click. However, risks have increased. Prime membership could be negatively affected by higher taxes and shipping costs for goods bought online.

The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.