Daily Management Review

Amazon, Short-Term Investors at Odds Again as they Debate Spending Vs. Profits


10/30/2016




Amazon, Short-Term Investors at Odds Again as they Debate Spending Vs. Profits
Amazon.com Inc was a "sell" for a lot of investors on Friday even though it may be a "buy" for the vast majority of analysts.
 
And few of those investors would have been disappointed, though. Amazon's stock had risen 36 percent in the past six months alone even as it fell 4.5 percent to $781.67 in morning trading.
 
The company's statement on Thursday that its operating income for the holiday shopping quarter would range from nothing to $1.25 billion, due to heavy investment across its businesses was the trigger for the profit-taking of the stock.
 
According to research firm Fact Set, few analysts expressed any concern about Amazon's prospects on Friday even  though they had expected operating income of $1.62 billion for the period.
 
"Shares tend to underperform over the near-term, but each of these phases has presented a great buying opportunity for long-term investors," Deutsche Bank analysts wrote in a note.
 
According to Thomson Reuters data, 41 have a "buy" or higher rating on the stock of the 46 analysts covering Amazon.
 
With Deutsche Bank saying it "represented the most important piece of the bull case", trends that also bodes well for the future are the strong performance of the company's cloud services business, Amazon Web Services.
 
Accounting for about 10 percent of overall revenue, revenue generated by Amazon's market-leading cloud business jumped 55 percent to $3.23 billion in the quarter ended Sept. 30.
  
"While weaker-than-expected margin guidance will spook some investors, we remain firm believers in the long-term story of growing revs and margins," Macquarie Research analysts wrote in a client note, while maintaining their "outperform" rating.
 
"The bottom line is that given the stock's run and fears of near-term margin pressure, investors are likely to take profits," the analysts said.
 
"We believe the payoff of these investments will create considerable growth and value for AMZN shareholders," saaod Goldman Sachs analysts, who have a "buy" rating on Amazon, said that while investments would weigh on margins in the near term.
 
For the past six quarters, Amazon has made a profit and the company went public in 1997. In recent times Chief Executive Jeff Bezos focused on building the business rather than on short-term results which had resulted in the company only making occasional profitable quarters previously.
 
While keeping their top ratings, but citing valuation, Goldman Sachs, Deutsche Bank and RBC cut the price targets on the stock. Targets were raised by Canaccord Genuity and Susquehanna.
 
Due to its fulfillment centers, that will help speed up deliveries - a strategy they said would pay off handsomely in future quarters or due to its heavy spending to build warehouses were the cause of most of the margin pressure on Amazon, analysts noted.
 
"As momentum builds up in all businesses, AMZN keeps investing to support that growth," Jefferies analysts said, while noting that some of these investments are "lumpy" and can take a couple of quarters to reach optimal efficiency.
 
"Our long-standing thesis remains intact as AMZN increases investment in the assets (fulfillment, digital content, AWS) that reinforce its competitive moats," the analysts said.
 
(Source:www.reuters.com) 






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