Shares of Amazon.com (AMZN) climbed in morning trading after the company reported quarterly earnings per share that handily beat analysts' estimates, while its revenue came in just above expectations. Meanwhile, the company said it plans to spend about $800M to move to one-day Prime delivery from the current two days.
EARNINGS AND GUIDANCE: Amazon on Thursday reported first quarter EPS of $7.09, surging past analysts' $4.72 consensus, while revenue for the quarter of $59.7B more narrowly exceeded analysts' average estimate of $59.65B. Amazon Web Services net sales for the quarter were $7.7B vs. $5.44B last year, with operating income for the unit of $2.22B vs. $1.4B last year.
Looking ahead, Amazon forecast second quarter revenue of $59.5B-$63.5B, or up 13%-20% vs. last year, compared with analyst's estimate of $62.37B. The company's guidance anticipates an unfavorable impact of approximately 150 basis points from foreign exchange rates. Operating income is expected to be between $2.6B-$3.6B, compared with $3.0B in the year-ago quarter, Amazon said.
ONE-DAY PRIME DELIVERY: Amazon also announced that the company plans to spend $800M in Q2 to move to one-day delivery for Prime customers from the current two days. On the company's Q1 earnings conference call, Chief Financial Officer Brian Olsavsky said "We’re currently working on evolving our prime free two-day shipping program to be a free one-day shipping program."
Amazon already offers one-day and two-hour shipping to Prime members for certain products at an additional cost, but the change would significantly expand the product selection and zip codes eligible for one-day free shipping, Olsavsky said on the call. The change will first take place in the North American market, Olsavsky added, but will eventually be expanded globally across all countries that offer Prime memberships.
Olsavsky said the company would use “all of the available levers” for free one-day shipping, including existing partners like the U.S. Postal Service and UPS (UPS), as well as Amazon’s own third-party delivery network. "We’re taking a significant step," he added.
JPMorgan analyst Doug Anmuth raised his price target for Amazon.com to $2,200 from $2,050 saying that he believes the move is "consistent with Amazon's long-standing goal of convenience and selection, but also likely reflects the increasingly competitive retail environment." He added that he came away from the Q1 results with more confidence in Amazon's ability to stabilize and potentially accelerate revenue growth. Amazon's move to one-day Prime delivery, on top of wage increases in November, will help further separate Amazon from competitors, driving more Prime subscriptions, expanding the total addressable market and widening the company's competitive advantages, Deutsche Bank analyst Lloyd Walmsley said, adding that Amazon's history with faster shipping shows that while it weighs on unit economics, the company can make up for lower profit contribution per order with an overall increase in orders, driving more contribution per Prime member. He raised his price target for Amazon shares to $2,315 from $2,300.
Morgan Stanley analyst Brian Nowak said that very few existing logistics and parcel delivery players have the ability to do nationwide one-day delivery today and "even fewer can do it at the vast scale and reasonable cost" that Amazon can. Nowak, who believes Amazon's one-day shipping offering can be used "as a shoe-horn to drive third-party shippers and partners" to use Amazon's budding logistics network and calls the push the company's "Trojan horse" for its next disruptive business, namely a third-party logistics network, lowered his price target to $2,100 from $2,200. KeyBanc analyst Edward Yruma said that a "game-changing" move to one-day shipping signals stepped up investments. Yruma said that he views the move as highly disruptive for all of commerce and, for now, Amazon is uniquely positioned to offer one-day shipping on a wide breadth of products. Additionally, he contended that Amazon's move will likely reaccelerate share gains in the medium term. Oppenheimer analyst Jason Helfstein raised his price target for Amazon to $2,100 from $2,085, saying Amazon's move to upgrade Prime to one-day free delivery vs. the current two-day timeframe "moves the goal posts again" for the retail industry. Barclays analyst Ross Sandler, in a post-earnings research note titled "Going For The Jugular With 1-Day Prime," said he thinks part of the one-day move is offense and part of it is defense.
Benchmark analyst Daniel Kurnos said Amazon's $800M investment into one-day shipping should solidify Amazon's "dominance in the marketplace." The analyst, who added his view that "anything that enhances Amazon's growth profile is likely to play well," raised his price target on the shares to $2,300 from $2,000.
OTHERS TO WATCH: Rivals Walmart (WMT) and Target (TGT), which also provide free shipping programs for customers, are weak in morning trading, with Walmart down 1.6% and Target down 4.5%.
