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Spending vs. profits: Amazon and investors at odds again

Published 10/28/2016, 10:04 AM
Updated 10/28/2016, 10:10 AM
© Reuters. Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City

© Reuters. Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City

(Reuters) - Amazon (NASDAQ:AMZN) Inc may be a "buy" for the vast majority of analysts, but it was a "sell" for a lot of investors on Friday.

Few of those investors would have been disappointed, though. While Amazon's stock was down 4.4 percent at $782 in early trading, it had risen 36 percent in the past six months alone.

The trigger for the selling was 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.

Analysts had expected operating income of $1.62 billion for the period, according to research firm Fact Set, but few of them expressed any concern about Amazon's prospects on Friday.

"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 (DE:DBKGn) analysts wrote in a note.

Of the 46 analysts covering Amazon, 41 have a "buy" or higher rating on the stock, according to Thomson Reuters data.

The strong performance of the company's cloud services business, Amazon Web Services, also bodes well for the future, analysts said, with Deutsche Bank saying it "represented the most important piece of the bull case."

Revenue generated by Amazon's market-leading cloud business jumped 55 percent to $3.23 billion in the quarter ended Sept. 30, accounting for about 10 percent of overall revenue.

"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.

Goldman Sachs (NYSE:GS) analysts, who have a "buy" rating on Amazon, said that while investments would weigh on margins in the near term, "we believe the payoff of these investments will create considerable growth and value for AMZN shareholders."

Goldman Sachs, Deutsche Bank and RBC cut the price targets on the stock, citing valuation, but kept their top ratings. Canaccord Genuity and Susquehanna raised their targets.

Analysts noted that most of the margin pressure on Amazon was due to its heavy spending to build warehouses, or fulfillment centers, that will help speed up deliveries - a strategy they said would pay off handsomely in future quarters.

"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.

© Reuters. Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City

"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.

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