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Internet ETFs in Focus on Amazon Sales Beat

Zacks Equity Research

The online e-commerce behemoth Amazon (AMZN) reported robust Q3 results after the market closed yesterday. The company showed massive improvements on both the top and the bottom line, reversing the trend of average negative surprises of 71.27% over the past four quarters.
Still, the net loss per share came in at 6 cents. Though this was in line with the Zacks Consensus Estimate, it narrowed significantly from 60 cents loss per share in the year-ago quarter.
Revenues jumped 26% year over year to $17.09 billion and strongly outpaced the Zacks Consensus Estimate of $16.78 billion. Most of the sales growth came from the domestic market (up 31%) while the international market (up 15%) also contributed to the upside (read: 3 Internet ETFs Leading the Tech World Higher).
Bright Outlook
The cheerful revenue performance by AMZN indicates that the momentum will likely continue into the crucial holiday season, which is expected to be hampered by the recent 16-day U.S. shutdown according to most industry experts. Further, it spread optimism in the market and raised investor confidence in the long-term growth story.
The company expects revenues in the range of $23.5–$26.5 billion for the fourth quarter, up 10–25% year over year. The high end is above our current estimate of $26.05 billion.
Further, Amazon is turning out to be a broad technology company with tablets and cloud computing services instead of just being an online retailer. This has resulted in increased spending which has taken a toll on AMZN’s earnings. However, the move would bear fruit once spending narrows and margins expand.
While AMZN has a Zacks Rank #5 (Strong Sell) for the short term, the stock has an Outperform recommendation for the long term. This indicates a bullish outlook for the company’s growth given various expansion plans and thus room for upside in the years ahead (read: Buy This Top Ranked Tech ETF Now).
Market Impact
Driven by the revenue beat, AMZN shares soared 8.26% in after hour trading, after rising 1.67% in regular hours yesterday, on heavy volume. This impressive run could be reflected in the ETF world as well with funds that have heavy allocations to the world's largest Internet retailer.
Below, we have highlighted two ETFs that look to be big movers in the coming days, given the solid performance by Amazon. Investors should closely monitor the movement in these funds and could catch the opportunity from any surge in the price from here, especially if it trickles into other internet names (see: all the Technology ETFs here):
First Trust Dow Jones Internet Index (FDN)
This is one of the popular and liquid ETFs in the broad tech space with AUM of about $1.8 billion and average daily volume of nearly 250,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year.
While the top 10 firms dominate the fund’s return with 56% of FDN, Amazon is the second firm making up for 7.92% share. The Internet and mobile segment accounts for more than half the portfolio, followed closely by Internet retail at 23% of assets. The rest of the portfolio provides a nice mix in a variety of related industries including software and communications.
The product gained nearly 41% year-to-date and has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘Medium’ risk outlook (read: The Incredible Run for NFLX Puts These ETFs in Focus).
PowerShares Nasdaq Internet Portfolio (PNQI)
This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds over 80 stocks in its basket with AUM of $204.6 million while charging 60 bps in fees per year. This product sees light volume of under 39,000 shares a day.
The ETF is heavily concentrated in the top 10 holdings with AMZN taking the third spot at nearly 8.30%. In terms of industry exposure, Internet & mobile application make up for two-thirds share in the basket, followed by Internet retail and software & programing. 
PNQI added nearly 53% so far this year and currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a ‘High’ risk outlook.
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