Amazon Can Expect Good Q4 On Holiday Sales

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We expect strong revenue growth accompanied bya slight improvement in margins as Amazon releases its Q4 2013 results on January 30. Although the retail sales during the holiday season showed mild growth, e-commerce benefited from the cold weather as buyers preferred shopping online rather than visiting stores. We expect Amazon's sales to grow faster than that of the online retail industry, due to its market leading position and supply chain efficiency. In addition, we expect some support from the continued expansion of web services, the Amazon Prime service and Kindle sales during the holiday season. The retailer stated that Kindle Fire saw strong demand during the quarter, leading to highest ever holiday sales for the device.

Our price estimate for Amazon stands at $338, implying a discount of about 15% to the market.

See our complete analysis for AmazoneBay's Results Suggest A Strong Quarter For Amazon Despite Concerns Around E-Commerce Growth

eBay's marketplaces revenues were up by 13% in the fourth quarter, roughly in line with the full-year growth. The growth sustained despite the company's warnings during its Q3 2013 earnings announcement regarding a slowdown in the U.S. e-commerce market, which materialized to some extent during the fourth quarter. While the holiday retail sales continued to grow for the fourth consecutive year, online retail sales grew by 10% during the period of November-December. This was below 14% growth forecast by comScore and 15% growth forecast by e-marketer. Some of this stemmed from the fact that retailers had to give deep discounts in order to drive sales. But the fact that eBay attained a higher growth rate than the overall market, implies that it took some share from other e-commerce retailer. This suggests that market leaders are likely to outperform the overall market. Therefore, we expect Amazon's quarterly revenue growth to remain high, and more or less in line with what we have seen in recent quarters.

Growth In Web Services And Amazon Prime To Aid EBITDA Margin

One of the risks that Amazon's stock has entailed for a long time is the company's low EBITDA margin, which makes it vulnerable to price fluctuations, supply chain disruptions and competition. However, the retailer has successfully pushed its web and cloud services in recent quarters, which is a very high margin business and will aid its profits going forward. The company defeated IBM in a bid to build a private cloud for the CIA (Central Intelligence Agency), and could add meaningful value to its stock if it can bag more such deals. Evercore Partners has pegged the segment's market potential at around $50 billion, which is huge given the company's current revenues mostly stem from its high margins on this business.

In addition to this, the continued expansion of Amazon Prime service will add to the bottom line. Currently, the service has more than 20 million members worldwide, which implies annualized revenues of close to $1.6 billion at membership fee of $79 per year. While the revenues earned from the Prime service account for just 2% of the company's total sales, the margins are much higher. Even if we assume Amazon earns a 30% EBITDA margin (higher than that for Netflix but still lower than that for many media companies) for its Prime service, it implies that Amazon Prime's EBITDA will amount to close to $500 million, thus accounting for nearly 10% of the company's total EBITDA. However, the importance of Amazon Prime extends beyond these numbers. According to a report, Prime customers tend to buy twice as much as the regular customers and overall accounted for 10% of the purchases in 2012. This proportion could increase going forward as Amazon continues to invest in the streaming content to lure in more buyers.

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