Amazon Q3: Still Happy After All These Years?

Amazon is expected to continue to wow Wall Street when it reports earnings tomorrow for the third-quarter despite a blitz of competition aimed at the Kindle.

The online retail giant posted double-digit revenue growth for several consecutive quarters during the recession, and with the economy showing signs of recovery, analysts believe Amazon (NASDAQ: AMZN) will continue reporting healthy earnings numbers.

“We expect Amazon to report solid Q3 results, with accelerating revenues trends likely reassuring investors that the longer-term growth story remains intact,” Sanford Bernstein analyst Jeffrey Lindsay wrote in a research note.

In July, Amazon forecast net sales to be between $4.75 billion and $5.25 billion, or to grow between 11 percent and 23 percent compared with third-quarter 2008. Wall Street is expecting third-quarter earnings of $0.33 cents per share on $5.03 billion in revenue, according to analysts polled by Thomson Reuters.

Lindsay said he expects North American revenue to jump by 15 percent year-over-year, with media sales slated to recover from the flat year-over-year trend in the second quarter.

“Amazon posted flat North American media sales in Q2, raising questions about whether the company’s growth story had hit a wall in the form of a secularly challenged media industry. However, our analysis suggests that cyclical factors have exacerbated the recent weakness and that Amazon’s trends will likely recover going forward,” said Lindsay.

He did caution that he does not anticipate media sales to rebound to the 20 percent growth rate of previous years, but still sees modest gains — four percent in sales for Q3 and eight percent for 2010.

Another bright spot for Amazon is the video game category, which is showing signs of stabilizing. The division realized steep declines (sales plunged by about 40 percent), that the company cited as the main reason for tepid numbers for Q2.

That’s changing, Lindsay said. “We expect console sales to benefit from recent price reductions (PS3 and Xbox from $399 to $299, Wii from $250 to $200). Sony stated that its PS3 sales have improved dramatically since the late August price cut. Nintendo has also cited a ‘very strong’ consumer response to the lower Wii console prices. In addition, sales for video game software should receive a boost from the larger installed base, plus an attractive new game line-up for 2010.”

Still, Wall Street will be keeping a close eye on Amazon’s media segment moving forward as consumers increasingly turn to digital versions of movies, music and periodicals — as opposed to physical goods. This could make Amazon’s business model vulnerable should that trend continue, despite its successful expansion into cloud computing and hosted third-party e-commerce.

Aggressive competition among e-tailers

Amazon’s earnings tomorrow come as the e-tailer aggressively fights to maintain the top spot in the exploding e-reader market and on the heels of its plans to purchase online shoe seller Zappos.com.

This reporting period will mark the first complete quarter to include sales of both the Kindle 2, Amazon’s front-running wireless e-reader, and its sibling, the Kindle DX, a big-screen model.

Amazon does not disclose sales figures for the Kindle, but research firm iSuppli has estimated it holds 45 percent of the market, followed by Sony with 30 percent. The company dropped the Kindle price to $299 from $359 in July, followed recently by a further cut to $259. It also introduced a $279 international version of the Kindle.

These steps come as the sector has seen competitively priced devices from rivals including Barnes & Noble, iRex Technologies, Spring Design and Sony.

On the acquisition front, Amazon in July said it would buy Zappos in a deal worth about $847 million — its biggest buyout to date. Amazon, will pay Zappos about 10 million shares of stock, along with $40 million in cash and stock paid to Zappos employees. The transaction will be finalized this fall.

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