, Inc. Price Target Cut For Continued Margin Pressure

Amazon investors have become more and more impatient with management’s plans to continue their heavy investments, but it doesn’t look like that will change anytime soon. Holiday shopping numbers suggest a solid December quarter for the online retailer, according to analysts at Canaccord Genuity. Indeed, Amazon reported a record-breaking holiday season late last month.

However, they’ve reduce their price target on the company due to continued margin pressure created by management’s never-ending list of investments and expansion efforts.

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Amazon starts off Q4 strong

In a report dated Jan. 7, 2014, analysts Michael Graham and Austin Moldow said they’re estimating a 16% growth rate for Amazon’s revenue during the fourth quarter. They based that estimate on data from multiple sources.  The data suggests increased promotions during the first part of the December quarter drove a strong start to the holiday quarter, possibly resulting in purchases being made earlier in the quarter than they have been in the past.

The analysts say one thing they can’t be sure of is Amazon’s Media segment, which has shown signs of weakening lately. They say since Media is sold directly from Amazon, it isn’t included in the data sources they consulted.

Amazon to keep targeting break-even

The Canaccord Genuity team expects Amazon management to continue with their four-year plan to operate at around break-even level. They expect the expansion in the online retailer’s gross margin to slow down, noting that the company’s spending on fulfillment and tech and content doesn’t show any signs of slowing down.

Another negative impact on margins has been from Amazon’s sales and marketing expenses. However, they think it has the greatest possibility of improving. Because of the continued pressure on margins, they cut their earnings per share estimates for Amazon.

For 2014, they expect Amazon to report a GAAP loss of 99 cents per share. For this year, they reduced their estimate from earnings of $1.55 per share to losses of 84 cents per share. For the fourth quarter of 2014, they expect GAAP losses of 11 cents per share, while for the first quarter of 2015, they project losses of 2 cents per share.

Amazon’s price target cut

The Canaccord Genuity team maintained their Hold rating but reduced their price target for Amazon from $310 to $300 per share. They note that the online retailer is trading at 1.4 times forward revenue and a “much lower multiple” for gross merchandise volume. That’s close to Amazon’s lowest levels of about 1.2 times, excluding 2008.

Because of the low multiples, they don’t see much risk of Amazon’s stock price declining much. They do point out though that the company’s share price could be affected by the negative sentiment on low-earnings stocks in the broader group. That negative sentiment is growing, and Amazon isn’t showing signs of speeding up top-line growth. They think improvements in the company’s margin are necessary in order for “the stock to work in the mid-term.”

Will patience pay off?

It certainly seems likely that Amazon investors will keep penalizing management’s decision to keep spending on expansion. This is a trend that has been going on for some time, and 2014 marked the tipping point for investors who tired of waiting. The low multiples do indeed suggest that Amazon shares are at about the lowest level they will go, unless there’s a huge disappointment in earnings. Investors who are extremely patient may find that their patience pays off in the end though—probably several years from now.

Shares of Amazon edged upward as much as 1.5% during regular trading hours today.