KeyBanc Expects, Inc. (AMZN) Whole Foods Deal Will Offer More Promising Value in the Long-Term Than at First 3Q Earnings Sight

Edward Yruma sets neutral, yet optimistic 3Q expectations on Amazon ahead of Thursday's print., Inc. (NASDAQ:AMZN) is warming up to post third quarter results, the first quarter of earnings following its Whole Foods deal. All eyes are watching to see how this acquisition fills the bill for the e-commerce king.

KeyBanc analyst Edward Yruma believes with the takeover having all i’s dotted and t’s crossed only by the end of August, leaving roughly 5 weeks of revenue on the third quarter table, the acquisition is a “non-event” for the forthcoming print. However, though down the line, the asset is certainly a “compelling” one.

Deeming the story of this company one that pivots between exciting long-term gains and short-term intense competition, the analyst reiterates a Sector Weight rating on AMZN stock without listing a price target. (To watch Yruma’s track record, click here)

In a cautiously optimistic preview ahead of this Thursday’s earnings due once the bell tolls, Yruma writes, “AMZN’s 3Q17 is likely to be more favorable, on balance. The Company will lap a step change in video expense (doubled in 2H16) as well as higher fulfillment expense. We are raising our estimates slightly for 5 weeks of WFM accretion. Cloud revenue at AWS to surpass an $18B run-rate growing in excess of 40% y/y. AMZN has strong LT growth prospects; however, we stay SW on increased near-term competitive dynamics.”

Moreover, regarding Whole Foods, the analyst believes it was a smart takeover move on Amazon’s part: “AMZN immediately began aggressive price investments […], so EBIT accretion is likely minimal for the quarter. The $13.7B acquisition gives AMZN 465 well-located stores and a loyal customer base. WMT has made significant progress in its omnichannel strategy over the past 12 months, and we increasingly think that challenging e-commerce economics requires a physical store strategy.”

As the company continues to capture market share “from the rest of retail” even during a tricky consumer atmosphere, it is no small feat, says Yruma, who anticipates the core retail products segment will maintain the second quarter’s rise of 17% year-over-year.

“Cloud revenue at AWS transitioning from hypergrowth to high growth.

Amazon Web Services (AWS) cloud revenue is a growth story that will likely show further unraveling in the third quarter. However, the analyst keeps in mind that with cloud revenue having escalated once to a state of “hypergrowth,” even a dial back for the e-commerce king still marks growth that soars high. “While AWS growth is poised to decelerate for the eighth quarter in a row, there are few enterprise franchises operating at an $18B scale while still growing in excess of 40% annually,” Yruma acknowledges, also pointing to a climbing amount of cloud IaaS alternatives for worldwide reach.

Wall Street is more confident than Yruma’s stance of cautious optimism on the e-commerce leader, as TipRanks analytics exhibit 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 23%, the stock’s consensus target price stands at $1,201.41.

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