Amazon On Course For Success 4 comments
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Brian Bolan, research analyst at Jackson Securities, sent a note to clients updating estimates for Amazon.com (AMZN) with a changed price target.
Amazon.com posted a very solid 2Q07 (see conference call transcript)and left Wall Street with the impression that it could increase margins for the second half of the year. Following the earnings release in late July, the stock soared well above our price target, but then retreated to pre-earnings levels as the broader market slipped due to credit fears.
Over the last month, there has been a lot talk swirling around the stock, with ideas such as a new payments platform and the highly anticipated launch of is digital music store. We have incorporated a late September launch of the music store into our estimates, but the payments platform is still likely to be a ways off.
A late September launch of a music service would not do much for earnings in the 3rd quarter, however, the headline will likely cause momentum players to once again run the stock higher. The 4th quarter will be a different story, and we have adjusted our expectations for media revenues to increase a healthy 32% from the same period a year ago. The Harry Potter book is likely to be a driver of media revenues in this quarter, and we expect sale of media related items to increase roughly 27% ahead where they were a year ago.
Electronics and other general merchandise is expected to post another solid quarter, our estimate calls for growth of 51% for the quarter. This does come off a relatively low base, so while the growth percentage is impressive, it is still expected to be about 34% of the total revenue.
The talk of Amazon.com payments service is a natural progression from the company that is offering storage via S3 and virtual server via EC2. Currently, the company offers a payment service to merchants selling items in their Marketplace as well as Auctions, but the new service is expected to be aimed at third party business that utilize some or all of Amazon.com’s other services.
We believe that payment service would make sense, but be negligible to both the top and bottom lines in the coming quarters. It would compete with the de facto web standard of PayPal as well as Google’s (GOOG) Checkout product. Therefore we would rather take a wait and see approach before touting this as a potential service as a game changer.
Looking to other areas, we note that on August 6th, the company noted that it was expanding its Jewelry and Watches stores to the UK, Germany and Japan. In the release, the company noted that jewelry sales increased significantly with diamond sales increasing 260%, color gemstones sales increasing 169% and sterling silver sales increasing 107%. We note these increases are likely of somewhat low levels but this segment has been a consistent triple digit grower over the past several quarters. Since the date of that particular release, Blue Nile (NILE), an online diamond seller has seen increased pressure on its stock price, following an initial jump following its own earnings release. We do not expect Amazon.com to entertain the idea of purchasing Blue Nile.
Valuation
Having easily surpassed our $75 price target installed at initiation of coverage (5/21/07) we believe that now is a good time to review what our 12 month target should be. We looked a few measures to arrive at our new target, and determined that multiples of 2.67x this years sales or 84x our adjusted earnings were all justifiable. These multiples are at the lower end of the ranges they have exhibited this year. These multiples lead us to a new price target of $90 per share.
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Disclosure: Jackson Securities, LLC does or seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions.
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This article has 4 comments:
Check on the progress of Amazon's Stock Repurchase Program. A year ago, in August 2006, the Board of Directors authorized a 24-month program to repurchase up to an aggregate of $500 million of Amazon common stock from which they repurchased 8.2 million shares for $252 million in 2006 and 6.3 million shares for $248 million in Q1 2007.
These trades were quite profitable for Amazon, yielding a gain of over $725 million at today's share price of $84.52. Not bad, considering the firm won't make this much in eighteen months of online retailing. So what about the subsequent plan announced earlier this year?
In April 2007, the Board of Directors authorized a new 24-month program to repurchase up to an aggregate of $500 million of common stock. In Q2'07, not one share was purchased! The average share price during the quarter jumped above $50 and Amazon's management knew better than to squander its windfall on the overpriced shares. Investors would be prudent to follow suit and wait for the price to return to a reasonable value -- below $50.
it's quite stunning what passes for serious stock analysis today. one is reminded of bubblemania reloaded when reading "... We looked a few measures to arrive at our new target, and determined that multiples of 2.67x this years sales or 84x our adjusted earnings were all justifiable."
Give me a freakin' break! The company has a whopping minus 1.9 billion $ in retained earnings (or put differently, 1.9bn in accumulated losses) on its balance sheet, the recent positive quarters notwithstanding.
But since it's a dot.com retailer, of course, it deserves a lofty P/E of 60 on top of the company so far having burnt shareholders cash.
cpa charlie nailed it with his analysis of the repurchase programme. his analysis containes way more stuff to think about than the superficial report that tries to justify a 90$ stock price with zero substance.
In the long term, the only ones making real money from AMZN will be Jeff Bezos and his folks who have been selling millions of shares at absurdly inflated prices to the dumb who buy it only to sell it to the even dumber...