Amazon Gave the Market What It Wanted

Following a fourth quarter that failed to live up to expectations,  Amazon (AMZN) gave the market just what it wanted in the first quarter, with continued top-line momentum and a sharp improvement in North American segment operating margins. 

Consolidated revenue increased 34% to $13.2 billion, surpassing consensus expectations of $12.9 billion and our own forecast of $13.0 billion and doubling comScore's 17% estimate for e-commerce industry growth for the quarter. The real story from the quarter was North American segment operating margins of 4.7%, a 180-basis-point jump on a sequential basis, which came even as the company continued to make meaningful fulfillment, technology, and content investments. This improvement lends credence to our view that Amazon can add margin expansion to its already impressive growth story in the years to come. International infrastructure investments and economic headwinds from Europe dragged down overall operating margins (1.5% on a generally accepted accounting principles basis, 3.0% excluding stock-based compensation and the amortization of intangibles), while earnings per share of $0.28 easily beat consensus of $0.07 and our forecast of $0.12, though it should be noted that equity method investment activity was responsible for $0.19 of the EPS contribution.

We plan to adjust our model based on the first-quarter results, though the impact to our full-year estimates will be relatively minor based on second-quarter forecasts that was generally in line with our model expectations. We don't anticipate adding more than a few dollars to our $225 fair value estimate. For 2012, we still forecast top-line growth around 30% (putting full-year revenue around $62 billion) and operating margins around 1.3% (2.8% excluding stock-based compensation and amortization of intangibles). Our medium-term valuation assumptions remain largely intact, including average annual revenue growth of 20% over the next five years and full-year operating margins reaching about 4% by 2015. Although we still consider Amazon one of our favorite long-term investment ideas in the consumer space due to a wide economic moat based on several structural cost advantages, we would wait for a pullback before considering an investment, following the stock's sharp upward movement Friday morning.

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