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Amazon (NASDAQ:AMZN) reported solid Q1 revenues and earnings, although Q2 guidance was below consensus expectations. Revenues were $19.74 billion, above our $19.52 billion estimate and the consensus estimate of $19.44 billion. EPS was $0.23, above our $0.17 estimate but slightly below the $0.24 consensus estimate. While the company expects a seasonally normal revenue decline in Q2, it guided to an operating loss for the quarter. This is in line with our prior estimate, but well below the solid profits expected by the rest of the street.
The company’s launch of Fire TV in Q2 will likely drive slight upside to sales for the quarter, but marketing expense is expected to rise. We had previously modeled a loss of $(0.06)/share for the quarter, but revised our estimate to $(0.19) to come in at the high end of the company’s guidance. Prior consensus expectations called for EPS of $0.25.
Amazon’s recent content agreement with HBO is expected to cost between $200-400 million annually, pressuring earnings for the balance of the year. These costs should be partially offset by accelerated growth in Prime memberships and we expect meaningful contribution from the recent Prime price increase. Accordingly, we are adjusting our 2014 EPS estimate to $1.00 from $1.07.
The company introduced a new service, Prime Pantry, that allows Prime customers to order normal sized purchases of everyday items for a nominal delivery fee. This offering, along with the recently introduced Dash (which allows Prime Fresh customers to scan and order grocery and other items in the home) reflect continuing innovation in the Prime offering, and suggest to us that it will continue to grow rapidly throughout 2014, likely driving revenues above expectations. The cost of these initiatives will likely limit earnings upside, however.
Maintaining our NEUTRAL rating and $330 price target. Our PT reflects a P/E multiple of 50 times our hypothetical FY:19 EPS of $8.38, discounted back five years. Our rating is based on our assessment that Amazon is unlikely to provide investors with a strategy road map. While recent announcements have given us increased visibility into Amazon’s revenue growth, we are not convinced that the company will share sufficient details about spending plans to allow us to accurately model profit growth, and it may take time before EPS grows sufficiently to justify its share price.
Michael Pachter is an analyst at Wedbush Securities.
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