24/7 Wall St. has been critical of Amazon.com Inc. (NASDAQ: AMZN) due to Jeff Bezos trying to run its growth ambitions at a level that feels more like nonprofit status than a corporation with shareholders.
Canaccord Genuity’s Michael Graham and Austin Moldow are also concerned with Amazon’s lack of care toward its margins, which is now expected to continue in 2015. As a result, Canaccord Genuity reiterated a Hold rating for Amazon and lowered its price target to $300 from $310.
The analysts are predicting a 17% gain in revenue for the fourth quarter. The data imply that Amazon got off to a strong start in the fourth quarter but then faded from there. Data points from other retailers suggest that early promotional activity likely pulled some purchase activity sooner in the quarter.
Considering Amazon’s margin structure, there is little reason to believe that management will have an incentive to change significantly its four-year streak of managing the business to a break-even level. The expansion of the gross margin should be slowing down. Sales and marketing has been a huge negative variance over the past few years, but at the same time may have the highest potential for improvement.
The brokerage firm also noted that Amazon trades at 1.4 times forward revenue, which is very close to trough levels — excluding 2008 — of roughly 1.2 times. As such, Canaccord Genuity sees limited downside risk for the stock. There is an increasingly negative sentiment towards low-earnings stocks in the group and an absence of top-line acceleration. Ultimately margin improvement will be needed to get this stock back in the game, in the medium-term.
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Amazon is expected to report its fourth-quarter earnings between January 28 and February 2. Thomson Reuters has consensus estimates of $0.18 in earnings per share and $29.75 billion in revenue. In the same period of the previous year, Amazon reported $0.51 in earnings per share and $25.59 in revenue.
Shares of Amazon were up roughly 1.5% at $299.88 in the noon hour. The stock has a consensus analyst price target of $357.16 and a 52-week trading range of $284.00 to $408.06.
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