Raymond James U.S. Research analysts Aaron Kessler and Ben Cohen rate Amazon.com, Inc. (NASDAQ:AMZN) as a Strong Buy as the e-commerce giant reports mixed 4Q results but guidance remains positive through LT Fundamentals.

Amazon

Amazon.com, Inc. (NASDAQ:AMZN) reported a mixed 4Q with solid gross margins and improved operating leverage though slowing revenue metrics (unit growth increased 25% y/y vs. 29% in 3Q). Additionally, Amazon guided 1Q revenues/operating income midpoints below consensus, though we believe these could prove conservative. While the slower revenue/units growth was somewhat disappointing, we believe this partially reflected the tougher 2013 holiday season, and we remain positive on the long term fundamentals of Amazon. We reiterate our Strong Buy rating and slightly lower our target price to $443.

Amazon’s 4Q13 highlights

Amazon.com, Inc. (NASDAQ:AMZN)’s total sales of $25.59 billion increased 21% y/y forex-neutral (vs. +26% y/y last quarter), below our/consensus estimates of $26.41/$26.05 billion but above the mid-point of guidance of $23.5-26.5 billion. Non-GAAP operating income of $876 million increased 29% y/y (vs. +15% y/y in 3Q) and was above our/consensus estimates of $845/$777 million and above guidance of ($150)-850 million.

Positives for Amazon

1) Gross Margins – increased 240 bp y/y driven by mix shift to 3P as well as AWS helping drive operating income upside vs. our/consensus estimates.; 2) AWS – we estimate Amazon Web Services grew ~ 70% y/y in 4Q. 3) Amazon Prime: Amazon indicated it is considering increasing Prime pricing between $20-$40 (Amazon hasn’t raised pricing in 9 years to the $~80/annual rate).

Negatives for Amazon

1) Worldwide Unit Growth Decelerated to +25% y/y from +29% y/y last quarter. As such, N.A. EGM Revenue slowed to 25% y/y (vs. +33% y/y in 3Q); 2) International Revenue Growth of 15% y/y forex neutral decelerated from +20% y/y in 3Q. Management noted the earlier stage of digital services internationally.

Guidance for first quarter 2014

For 1Q14, Amazon.com, Inc. (NASDAQ:AMZN) expects revenue of $18.2-19.9 billion, vs. our/consensus prior estimates of $19.8/$19.7 billion. Non-GAAP operating income guidance of $150-$550 million is below our/consensus prior estimates of $646/$587 million.

Estimates and valuation

We are lowering our 2014/2015 revenues estimates by 2.8%/4.1% while lowering our non-GAAP operating income by 11%/2.9%. We note that our operating income estimates for 2014 were on the aggressive end of street expectations. Our 2014/2015 non-GAAP EPS estimates move from $4.69/$7.43 to $4.12/$7.16.

We are modestly lowering our 12-month target price for Amazon.com, Inc. (NASDAQ:AMZN) to $443 based on our sum-of-parts analysis of 2015 revenues.