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Oct 25, 2019

Here's what Wall Street is saying about Amazon's profit drop

Why this money manager is buying international stocks in the thick of U.S. earnings season

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Amazon.com Inc.’s first quarterly profit drop since early 2017, as well as a miss for next quarter’s guidance, prompted price-target cuts from analysts including Goldman Sachs, RBC Capital and Baird. Shares fell 5.3 per cent pre-market in the U.S.

Still, Wall Street remains largely confident in the tech behemoth’s long-term growth prospects. Focus now turns to advertising and growth for Amazon Web Services (AWS) as the company continues to invest in one-day delivery, according to analysts.

“The whole picture points to short-term pain for a visible long-term gain,” Bloomberg Intelligence said. The pre-market drop takes the shine off a 19 per cent year-to-date gain.

Here’s a roundup of what analysts are saying about Amazon’s report:

Goldman Sachs, Heath Terry

(Buy, cuts price target to US$2,200 from US$2,350)

The deceleration at AWS raises some competitive concerns; still, continue to believe in the relatively early-stage shift of workloads to the cloud, the transition of traditional retail online, and the continued development of the advertising business.

With revenue growth accelerating for the second quarter in a row and a strong history of the company’s investments driving faster growth, still sees AMZN as one of the best risk/rewards in the sector.

Jefferies, Brent Thill

(Buy, price target US$2,300)

Quarterly sales beat consensus while operating income was at high-end of guidance. However, outlook represents top and bottom-line downside to consensus at the midpoint and high-end.

That said, near-term pressure from one-day shipping has little bearing on ability to generate profit upside from faster sales growth at higher-margin AWS and advertising.

UBS, Eric J. Sheridan

(Buy, US$2,100)

Not surprised with the initial negative stock reaction, but says it might be more of a reflection of a broader risk-off market environment among tech investors.

Says AWS sales growth was better than feared, while other revenue (predominantly advertising) demonstrated solid re-acceleration.

Given investments, an overall Ebit above the high end of management guide is a positive outcome.

RBC, Mark S.F. Mahaney

(Outperform, price target cut to US$2,500 from US$2,600)

This was a slightly soft quarter for AWS, likely due to Amazon’s push into large-scale enterprise in addition to perhaps some pricing pressure.

AWS growth and profit outlook deserves the most attention right now, while rest of the buy thesis is fully intact.

BMO Capital Markets, Daniel Salmon

(Cuts price target to US$2,000 from US$2,280)

AWS results were below expectations, but continues to see strong long-term growth.

Advertising revenue growth accelerated ahead of expectation, driven by targeting improvements, ad load increases, and easier comparisons. Optimistic there could be upside against easy comparatives from a year ago.

Baird, Colin Sebastian

(Outperform, price target cut to US$2,080 from US$2,150)

“We are buyers of Amazon on a pullback as investors digest the cost of one-day Prime.”

Do not believe implied growth slowdown reflects any meaningful change in trends with the core segments. Expects low-midpoints of quarterly revenue guidance to prove conservative.

Morgan Stanley, Brian Nowak

(Overweight, price target US$2,100)

Quarter was lower than expected, but MS says one-day efficiency improved dramatically, which is key for long-term.

Cost and complexity of competing with Amazon is rising as firm raises consumer expectations quickly. Estimates 25 per cent of U.S. units went through one-day delivery in third quarter.