Over the next week 24/7 Wall St. will set mid-year price targets (June, 30, 2007) for the sixty most widely traded stocks. These targets will be based on past price performance, industry activity, forward projections of financial performance, outside analyst opinions, and research conducted for doing past articles on these firms. The price targets assume flat markets over the next six months. In other words, if the Nasdaq moved up 25% between now and mid-year, the target share price targets would probably be too low. If the market moved down by 20%, they would probably be too high.
Amazon (AMZN). Amazon has a lot of critics. Citigroup recently downgraded the stock due to valuation issues. But, the stock is down 20% over the last year, Shares have not been hurt by revenue growth, which as been good, as much as by the concern that the margins on merchandise are low and shipping costs are too high.
But, Amazon has some important advantages. First, it has a brand, which brings tens of millions of people to its website. Next, its IT infrasturcture is in place and largely paid for. As its expands its product offerings into areas like movie downloads and merchandise categories, most of the underlying costs of handling the sales process is already covered.
Amazon is also certain to be a beneficiary of rapidly growing e-commerce revenue. Comscore reports that consumer spending online rose 26% in 2006.
Amazon continues to get into new e-commerce sectors. It opened a new handbag and shoe website and it is likely it will find new sectors where it can make money selling goods and services.
Amazon’s management is aware of the market’s concerns about product margins and shipping fees. There is certainly some change that these will be addressed over the next couple of quarters.
Building a global brand is hard to do, but once it is in place, it’s priceless.
Factors that could move price above forecast: Amazon announces a detailed program for improving its shipping and marketing costs. The companies initiatives into areas like video downloads could do better than expects.
Factors that could drop price below forecast: If margins on heavy volume products continue to drop, the market will walk away from the stock.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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