A couple of observations. One, look at that chart: after a big slide in July following the last earnings report, the stock has moved steadily higher, but still remains sharply lower over the last 12 months. If you bought on the post-Q2 downdraft, you must be feeling like a genius.
Two, despite the nice move in the stock, Amazon is not a name most Internet analysts really like. In particular, they are not happy to see continued deterioration in the company’s margins. Mary Meeker at Morgan Stanley, a steadfast Amazon supporter, still recommends the stock, but not a lot of other people do. Thomson/First Call counts 3 analysts with buy or strong buy ratings, 13 Holds and 10 Sell or Strong Sells.
I’m also wondering if the move is being fueled in part by short-covering. Short interest in Amazon shares has increased in five out the last six months, and is the 15th largest of all Nasdaq stocks:
Amazon Short Interest:
- October: 44.3 million shares
- September: 43.6 million shares
- August: 40.2 million shares
- July: 36.5 million shares
- June: 36.9 million shares
- May: 34.4 million shares
- April: 30.5 million shares
Anyway, here are a few samples of this morning’s research on the stock; I’ll start with the naysayers - almost everyone - and then move on to Meeker’s more upbeat note.
- Mark Rowen, Prudential: We would use the strength in the stock as an opportunity to sell…AMZN is currently trading at a significantly higher multiple than Internet leader Google (GOOG), and most retailers. We continue to believe that AMZN’s future growth rates will not support the current stock market valuation of the company….We reiterate our Underweight rating and our $25 price target.”
- Mark Mahaney, Citigroup: This is a very unusual stock. One what was a very slight Beat & Raise quarter, the stock should have traded up in the after-market. But up 14%?! Just doesn’t make a lot of sense to us. Especially given the recent run-up in the shares. It’s true that sentiment on AMZN has been negative for some time. It’s true that the First Call consensus estimate inched down from 4 cents to 3 cents very recently, creating an easied hurdle for AMZN’s Q3 results. It’s true that AMZN’s operating margins are likely to ramp nicely [sequentially] into December. And it’s true that December is AMZN’s seasonally strongest quarter. But up 14%?!…Reiterate Hold.
- Heath Terry, Credit Suisse: Maintaining our Neutral rating….While we continue to believe in the long-term model, the continued decline in margins and free cash flow along with the stock’spremium valuation relative to the group will limit any outperformance.
- Imran Khan, J.P. Morgan: In the steepest increase since [the 2004 fourth quarter], AMZN grew its inventory 61% [year-over-year] in Q3, vs. 36% in Q2. AMZN continues to improve its product selection and in-stock levels. If AMZN does not achieve revenue acceleration in Q4, it may be forced to liquidate inventory at low prices, pressuring margins…Maintain our Underweight rating.
- Jim Friedland, Cowen: Although we do not expect a further deterioration in margins, we believe the stock is overvalued relative to its peers…We maintain our Underperform rating.
- Jordan Rohan, RBC Capital Markets: This is not the time to be bearish on Amazon. Margin guidance was a slight surprise and gives hope to investors looking forward to seeing that trend extend into 2007. We have adjusted out estimates slightly and have maintained our Sector Perform rating, as we are unsure whether one good quarter foretells a trend.
- Mary Meeker, Morgan Stanley: With a challenging period seemingly moving behind it, AMZN’s model of driving customer satisfaction may finally be paying off for investors. For starters, [fourth quarter and 2007 estimates] seem to be looking up, with out upwardly revised forecasts reflecting strong revenue growth and margin expansion. And with these improvements may also follow a re-acceleration in free cash flow growth…Reiterate Overweight.
One final note: The pick-up in Amazon.com shares won’t be enough to drive Bill Miller’s Legg Mason Value fund high enough to catch up to the S&P 500; the fund’s vaunted streak still seems likely to come to an end this year - through yesterday, the fund is down 0.3%, about 12 percentage points behind the index. But with 4.75% of the fund in Amazon shares, it could help push the fund into the black for the year. (The fund owns a big stake in Google, which has helped trim the portfolio’s year-to-date losses; Miller’s fund also has a substantial stake in Qwest (Q), which as noted earlier is higher on an upgrade from UBS.)
Amazon shares today have gained $3.74, or just over 11%, to $37.37.
Related: Amazon.com Q3 2006 Earnings Call Transcript