Top Analyst Wagers Amazon.com, Inc. (AMZN) Stellar 3Q Showcase Benefits from Retail Mix Shift to First Party Sales

Michael Olson: Between first party sales shift, AWS strength, and robust ad revenue, AMZN hits a home run.


Amazon.com, Inc. (NASDAQ:AMZN) investors are in an excited flurry today, sending shares on a nice 9% upward turn after boasting a third quarter earnings beat.

Top analyst Michael Olson at Piper Jaffray is out with a bullish research note sharing key highlights from a quarter that saw the online auction and e-commerce leader takeover Whole Foods.

On the heels of the print, the analyst echoes the bullish parade across the Street, reiterating an Overweight rating on AMZN stock with a $1,200 price target, which represents a 13% increase from where the stock is currently trading.

For the third quarter, the e-commerce king spun out a revenue outclass, bringing $43.7 billion to the table over the Street’s $41.6 billion, which Olson attributes to the Whole Foods takeover as well as a mix transition over to first party sales. This is crucial, considering the company takes a greater piece of the revenue pie here compared to third party commissions. Amazon Prime Day saw a rise in Prime subscriptions coupled with the first party mix shift.

Olson continues, “Another positive in Q3 was the lack of any y/y deceleration for AWS, which grew 42% in both Q2 and Q3. Retail subscription services revenue was ahead of expectations, likely due to Prime subscription growth, along with other content subscriptions (books & music). Other segment revenue was also strong, due to advertising. The company reported op income above the high end of its guidance range and guided the midpoint of Q4 op margin to 1.7% vs. consensus of 2.8% (high end of range is 2.8%). Amazon continued to point to heavy investment in media, fulfillment build outs, and headcount growth in various areas.”

Not only does the revenue upside from the print signal the success of a first-party mix evolution, but the analyst likewise commends the “ongoing strength of AWS.” Though the company’s retail unit growth saw a dip from 27% in the second quarter to 25% in the third quarter, revenue nonetheless outclasses expectations precisely because of this mix shift from third party over to first party sales. Olson draws attention to first party sales comprising of half of the retail unit mix this last quarter, a rise from 49% in the second quarter.

AWS was another all-star for Amazon in its quarterly performance on back of revenue reaching $4.58 billion, racing ahead of the Street’s $4.52 billion. Even with this revenue in mind, AWS annual growth actually stood “flat” between the second and third quarter at 42%. AWS revenue upside rode an operating income wave that outclassed consensus by a whopping $130 million, with overall GAAP operating income for the quarter racking up $347 million, trouncing consensus of $145 million.

Olson cheekily concludes that “Amazon appears uninterested in being a drug dealer,” predicting, “We believe Amazon is unlikely to engage in selling pharmaceuticals to consumers in the near future, despite recent talk to the contrary. Our conversations with the company suggest a lack of interest in pushing into the industry, due to complexities around regulation and product delivery.”

Michael Olson has a very good TipRanks score with a 65% success rate and a high ranking of #81 out of 4,703 analysts. Olson yields 18.3% in his yearly returns. When recommending AMZN, Olson earns 7.0% in average profits on the stock.

The e-commerce king is without question a Wall Street favorite, considering TipRanks analytics indicate AMZN as a Strong Buy. Out of 32 analysts polled by TipRanks in the last 3 months, 30 are bullish on Amazon stock while 2 remain sidelined. With a return potential of nearly 24%, the stock’s consensus target price stands at $1,201.41.