Seeking Alpha

Only one downgrade for Amazon post-earnings; sell-side mostly defends

  • Though its shares have tumbled, Amazon (AMZN -9.9%) has received an equal number of PT hikes and cuts (7 apiece) after missing Q4 estimates, offering soft Q1 guidance, and stating it's weighing a Prime price hike as it contends with heavy usage and still-surging fulfillment spend. S&P is the only firm to change its rating, cutting shares to Sell.
  • Benchmark remains optimistic about long-term margin expansion, and believes Amazon will still deliver 32% OIBDA growth in Q1. The firm chalks up Q4's major slowdown in EGM revenue growth (23% vs. 29% in Q3) to aggressive holiday season electronics discounting.
  • Cowen estimates a Prime price hike would produce $380M-$760M/year in gross profit at current subscriber levels. Morgan Stanley believes the churn impact of a hike would be limited, given its belief "Prime remains one of the best values around."
  • Susquehanna likes the fact gross margin rose again. Evercore thinks Amazon's paid unit growth slowdown (25% vs. 29% in Q3) is "largely temporary," and have much to do with Amazon's international media sales being behind its U.S. ops in transitioning to digital.
  • Amazon mentioned on its CC (transcript) active accounts rose by 13M Q/Q to 237M. 3rd-party sellers accounted for 39% of paid units vs. 40% in Q3.
Comments (42)
  • Archman Investor
    , contributor
    Comments (2351) | Send Message
     
    Does anyone really think that the mutual funds, asset gatherers, and the Mo-Mo investment banks that rely on Amazon to save their trading butts are really going to downgrade? LOL.
    31 Jan, 02:44 PM Reply Like
  • Jeffry Chmielewski
    , contributor
    Comments (596) | Send Message
     
    If the Amazon stock really even traded - and that us one of the biggest issues here. As a percentage of shares outstanding Amazon trades a fraction of what other MoMo names trades - Average Daily Volume is only around 2.5mm shares. And there are nearly 30 fund with positions greater than ADV.

     

    There is simply no way for them to sell these large positions at levels anywhere near the current marks.

     

    Portfolio managers at large Growth funds are going to have a really hard time justifying this position at investment committee meetings. Remember, most of these investment committees purchased these shares years ago expecting 25-50% growth on the top line. That's not happening any more.

     

    There will be meeting after meeting in the coming weeks.

     

    Slow moving mutual funds will be meeting in conference rooms deciding how much to sell. In the mean time, fast moving hedge funds will be front running the trades --- by shorting before they can run for the exit door.
    1 Feb, 07:14 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    It will be fun to watch AMZN over the next quarters finding new excuses why the bottom line shows little profit while revenue growth is slowing in some areas.

     

    At least the price hike in Prime to, say, $99 could fool consumers in price psychology. Still below $100 for Joe Amazon. I don't see how they can keep the current pricing and be profitable.
    1 Feb, 08:56 AM Reply Like
  • sandymac01
    , contributor
    Comment (1) | Send Message
     
    let me guess, you are short
    2 Feb, 08:24 PM Reply Like
  • Johnwoods41
    , contributor
    Comments (99) | Send Message
     
    The point is the stock has been valued as the company that will rule the world, that it would strive for revenue growth at whatever cost, putting everyone out of business, now they are worried prime subscription it hurts and they know it , prime members buy lots and lots of low margin products, and lots and lots of individual shipments, the postage cost hurts

     

    So if they hike you will see a lot of people leave prime.. Now unfortunately they will be the most profitable customers... They will be the ones on the margin where they actually order very few things each year so are not costly prime customers, they might even order high margin items, now they still might purchase, but will take the free postage option. Then you will get an increase in the free trial set, who try for a month and cancel, most like they sign up for the holidays. So raising the price of prime will slow revenue growth. Then we can start to value the company on profitability and not future dreams.
    31 Jan, 03:00 PM Reply Like
  • MS1977
    , contributor
    Comments (3) | Send Message
     
    well said.
    31 Jan, 04:23 PM Reply Like
  • Peter Larson
    , contributor
    Comments (611) | Send Message
     
    Bingo- it's a literal death spiral.

     

    Prime is not profitable unless product margins > shipping costs. That became false in late 2012.

     

    The amount they charge upfront is irrelevant due to adverse selection. Same as Costco and Sam's Club.
    31 Jan, 04:40 PM Reply Like
  • 6034700
    , contributor
    Comments (209) | Send Message
     
    Johnwoods 41; Really, a lot of people will leave prime? For $20 a lot of people will leave prime?
    These people would prefer to drive to the malls?

     

    31 Jan, 03:11 PM Reply Like
  • Peter Larson
    , contributor
    Comments (611) | Send Message
     
    Dear Amazon employee-

     

    Please come up with a new line for your fake comments.

     

    In 2014, people are well aware that there are numerous options in between "drive to the malls" and "pay $100 to be locked into a single website".
    31 Jan, 04:43 PM Reply Like
  • chopchop0
    , contributor
    Comments (3131) | Send Message
     
    Yeah. It's called wmt
    2 Feb, 02:19 AM Reply Like
  • mevina
    , contributor
    Comments (7) | Send Message
     
    AMZN is one of the last dinosaur giants still helping the US economy grow by hiring US workers and furnishing platforms for even more US home-based businesses. Everybody I know shops AMZN.
    2 Feb, 01:17 PM Reply Like
  • Johnwoods41
    , contributor
    Comments (99) | Send Message
     
    6034700 I cancelled my prime membership in the uk as it wasn't cost effective, more and more of things I was purchasing were from third party sellers and didn't qualify for free postage. Now often I buy and collect in store ( usually the next day) from other retailers. I Still purchase from amazon, but just take advantage of the free postage option.
    31 Jan, 03:20 PM Reply Like
  • DanoX
    , contributor
    Comments (2584) | Send Message
     
    When Amazon/Google finally blows-up they will take all the other tech stocks with them.
    31 Jan, 03:26 PM Reply Like
  • Mort19
    , contributor
    Comments (175) | Send Message
     
    Amazon won't. They are barely a tech stock even though that's what your fed. They are mostly an on-line retailer except without the profit margins retailers have. Now with their distribution centers you can think of them as a reverse brick and mortar catalogue type business.

     

    On the tech side they can't compete with the deep pockets or MSFT, IBM, INTC, AAPL etc.

     

    Consider them disrupted.
    31 Jan, 11:06 PM Reply Like
  • chopchop0
    , contributor
    Comments (3131) | Send Message
     
    Goog way more reasonable here than amzn imo. They actually care about profits
    2 Feb, 02:20 AM Reply Like
  • 6034700
    , contributor
    Comments (209) | Send Message
     
    Johnwoods41; I am sure that most Prime users just like the service which is the best and is much more pleasant then driving to a mall.
    Most people do not count the nickels and dimes and love the service.
    31 Jan, 03:37 PM Reply Like
  • Jeffry Chmielewski
    , contributor
    Comments (596) | Send Message
     
    It really is hilarious.

     

    The Amazon fee increase was just a plug to put in the model so that the lowered guidance wouldn't look so bad. And it worked. Fooled the analysts. They add some extra fee income in the model, lower the growth and the same number comes out as before. Viola.

     

    But it still doesn't address the cash flow issues. Amazon has been funding from an operating cycle arbitrage. Now that growth is slowing there are big problems ahead. You can't keep borrowing A/P and calling it 'cash flow' forever. That 'free pass' is about to expire.

     

    We are mostly likely looking a situation like Apple where Amazon sells off for months. It is basically exactly the same scenario. The growth thesis has come under fire, and Institutions have massive positions that are impossible to liquidate quickly.

     

    In situations like this, he who sells first, sells best.
    31 Jan, 03:40 PM Reply Like
  • bobelouis
    , contributor
    Comments (47) | Send Message
     
    You are right about the balance sheet......All the talk about cash flow, but year over year the debt just keeps piling up. If you leave out the inventory total which is going to be required regardless to fill up those nice new warehouses, net working capital declined another $2 billion for the year to a negative $5.7 billion. I looked in the filed 10k to see if they disclosed a line of credit disclosure with a bank, but it makes no mention, so either that is another fine disclosure they think they don't need, or they are likely to line one up or go to the debt market again. They and Netflix are incurring obligations much faster than their income levels can likely service.
    31 Jan, 04:05 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (584) | Send Message
     
    S&P is not involved in investment banking or trading business, and it's the only company to cut the stock to sell. What a coincidence!
    31 Jan, 04:49 PM Reply Like
  • bryon Li
    , contributor
    Comments (95) | Send Message
     
    Jeffry,

     

    Judging from pricing action, the break down just begins. Once Amazon tries to make more profit with fee increase, its growth will slow down, institutions will rush to exit . Your theme is going to play out.
    31 Jan, 05:04 PM Reply Like
  • Jeffry Chmielewski
    , contributor
    Comments (596) | Send Message
     
    The other thing analysts seem oblivious about: Isn't the fact Bezos is even considering raising the Prime fee an admission of what has been suspected all along --- that Amazon has been growing the top line by selling at a loss? (And thus growing 'cash flow' via a negative cash conversion cycle)

     

    Intentionally or not, Amazon has more or less turned the 'we're not profitable because we are investing' meme right around by admitting it has been selling at a loss.
    1 Feb, 06:55 AM Reply Like
  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    "S&P is not involved in investment banking or trading business, and it's the only company to cut the stock to sell. What a coincidence!"

     

    Since some people still believe in Chinese walls and purity of sell-side "advice" (especially for retail investors at the end of the food chain) I just wanted to quote this good comment.
    2 Feb, 02:04 AM Reply Like
  • 6034700
    , contributor
    Comments (209) | Send Message
     
    Jeffry; there are so many ways to increase revenues and increasing the cost for Prime is just one of them.
    31 Jan, 03:49 PM Reply Like
  • mevina
    , contributor
    Comments (7) | Send Message
     
    Bot 100 AMZN shares today in 10's on the way down. Wish I'd shorted it, wish I had cash to buy more.
    31 Jan, 03:57 PM Reply Like
  • criticalbear
    , contributor
    Comments (81) | Send Message
     
    well, now that most major retailers have aggressive price matching and amazon charges sales tax in most places, it's become less and less important for me to buy stuff off of amazon versus getting it from my local bestbuy/walmart/target.
    31 Jan, 04:01 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8144) | Send Message
     
    (GDXJ) will crush (http://bit.ly/JjWCE4) in 2014.
    That is my #1 call for the year.
    There is absolutely no reasonable explanation available to convince a logical investor that Amazon's earnings will grow into its current valuation any time in the next decade.
    $9.746 billion in shareholder's equity on a $164 billion market cap!?!? Are you kidding me?
    Amazon 2014 is JDS Uniphase 1999.
    (JDS Uniphase closed at ~$813 split-unadjusted 14 years ago today)

     

    JDSU closed today @ ~$13.29
    31 Jan, 04:03 PM Reply Like
  • Jon Peter
    , contributor
    Comments (731) | Send Message
     
    Don't see the correlation or anything strategically in common of a gold miner ETF and the online juggernaut of amazon. But you maybe correct from strictly a pickers perspective. Who knows?
    1 Feb, 04:26 PM Reply Like
  • elkarlo
    , contributor
    Comments (185) | Send Message
     
    I just don't see how Amazon can raise it's margins significantly. Basically it needs to raise it's earnings per share to $11 or so just to get to a semi reasonable PE of 35. How? Not with their razor thin margins. If they raise their prices, customers will go elsewhere. And prime isn't all that great for what it changes. Seriously unimpressed with what Amazon has portfolio wise.
    31 Jan, 05:52 PM Reply Like
  • Harmonica2
    , contributor
    Comments (21) | Send Message
     
    Whereas Amazon's stock finally reacted to an earnings miss, I hereby proclaim January 31 to be Paul Santos Day.
    31 Jan, 05:53 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (584) | Send Message
     
    Excellent idea! I will repost.
    31 Jan, 05:56 PM Reply Like
  • SyrPhil
    , contributor
    Comments (29) | Send Message
     
    Can't agree more!
    31 Jan, 11:08 PM Reply Like
  • PersephonShropshire
    , contributor
    Comments (137) | Send Message
     
    Haha!
    1 Feb, 03:09 AM Reply Like
  • SoCalNative
    , contributor
    Comments (429) | Send Message
     
    Classic.
    1 Feb, 11:11 AM Reply Like
  • Qualified to Represent...
    , contributor
    Comments (20) | Send Message
     
    Classic, I agree!
    1 Feb, 01:25 PM Reply Like
  • Tales From The Future
    , contributor
    Comments (4086) | Send Message
     
    A short portrait of the man for newer readers who may not be familiar with his critical AMZN articles on SA:
    "Amazon’s Prophet and Losses"
    http://nyti.ms/1adN6qg
    2 Feb, 02:06 AM Reply Like
  • rjbuchholz
    , contributor
    Comments (3) | Send Message
     
    I have found that browsing on Amazon and then contacting the third-party vendor directly saves me as much as 10 -15%. Originally I called just for product information but some vendors actually volunteer the lower price "because we are saving Amazon's cut."
    1 Feb, 01:04 PM Reply Like
  • genekl
    , contributor
    Comments (6) | Send Message
     
    While the major draw for Amazon is ease of use and access to selection, and the major draw for Prime is free shipping... there are other benefits such as free streaming movies/tv. It's never going to be a serious contender to Netflix etc (other than to keep them relatively honest), but is a high margin revenue stream that helps profitability and subsidizes shipping.
    1 Feb, 02:54 PM Reply Like
  • Andrei Volgin
    , contributor
    Comments (584) | Send Message
     
    "High margin revenue stream"? I am certain Amazon is losing a lot of money on streaming.
    1 Feb, 04:28 PM Reply Like
  • bobelouis
    , contributor
    Comments (47) | Send Message
     
    I don't think the prime customer makes them any money it only helped to segment customers and drive sales.......the logical prime user was a high frequency, low price basket purchaser who didn't exceed the $25 limit (and saw some value in getting it sooner or just enamored with the ease of how they can spend their money faster than their neighbor) and saved sales tax instead of buying it local. The gross profit on a up to $25 purchase on average is less than $6, hard to earn enough for handling and shipping for these orders ever. And now that sales tax now comes into play in more states, it is a wash to buy the lower priced items still, but for higher priced items where you can still find vendors with lower prices and sales tax free purchases, the prime customer has an incentive to move the more profitable transactions outside of Amazon. So I think the Prime program is one of adverse selection, with sales tax and other competitors matching price able to push the larger profitable transactions to other vendors instead of Amazon. Amazon is only hoping to retain the mindless customer to automatically order everything from them. But retail customers for thousands of years have always learned to right click Google to find a cheaper option (in a manner of speaking). Amazon and the rest of the public will just remember why there is no milkman making deliveries every morning.
    1 Feb, 08:53 PM Reply Like
  • pdxlou
    , contributor
    Comments (6) | Send Message
     
    The most common misconception about AMZN's business is that it improves with scale. That somehow more and larger warehouses will make the company profitable where it otherwise wouldn't be. As the owner of an e-commerce business that will do over $50M in sales this year (golfclubs.com, pooltables.com, biketiresdirect.com) I can tell you with absolute certainty that it doesn't. We operate a network of small warehouses that are dedicated to a single vertical (golf, billiards or cycling). Putting them all under one roof would cost considerably more and the 'pick and pack time' per order would increase correspondingly. AMZN's best days are behind it and I'm short the stock.
    2 Feb, 08:00 PM Reply Like
  • bryon Li
    , contributor
    Comments (95) | Send Message
     
    Pdxlou,

     

    Insightfull information. Do you get more business through your own wedsite or through both Amazon and Ebay?do you find it more efficient using your own warehouses or Amazon fulfillment services?

     

    Thanks
    2 Feb, 10:09 PM Reply Like
  • pdxlou
    , contributor
    Comments (6) | Send Message
     
    We get most of our new customers from Google & Bing and use email to drive repeat orders. Amazon's commission and Ebay's support issues keep us off those platforms. Also Amazon's fulfillment services are uncompetitive at our volume.
    3 Feb, 12:19 PM Reply Like
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