Amazon looks for solid Q4 results

Canaccord Genuity Technology Analyst Michael Graham has updated key assumptions for 2013 and 2014, ahead of Amazon’s Q4 report this week. He believes Q4 will likely be solid and resemble the first three quarters, with robust top line trends and subdued margins. As such, he is updating our forecast to account for continued Prime penetration, faster 3P growth, Kindle ecosystem expansion, and international fulfillment build-out.

Amazon’s current period of low margins, which has lasted longer than most anticipated, seems to have been driven by a mixture of discretionary and structural factors.

On the discretionary side, Graham notes that Sales & Marketing and Technology & Content account for nearly 80% of the negative margin variance over the past three years. On this basis, it seems clear that management does have at least some ability to manage margins in the very short term. However, he believes management has little incentive to slow spending down.

Graham believes most of the technology spending is to support AWS and that Sales & Marketing ROI is high as traffic and revenue on Amazon reaches ever-new levels. With many worlds left to conquer and the stock essentially working with little apparent shareholder friction, it is not clear to Graham what reason management might have in the near term to suppress these discretionary spending levels.

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