Analysts Tick Amazon’s Price Rally

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Amazon.com (NASDAQ: AMZN) was one of the most impressive tech stocks in 2012. The e-commerce giant rallied 40 percent during the period; it is now up about 8.5 percent in 2013. Amazon seems to be ready to carry on last year’s rally through 2013, and possibly beyond. Indeed, even analysts are being wooed to believing that Amazon is likely to hit $300 per share and above in the near future.

Could All These Major Analysts Be Wrong?

According to recent ratings, from Jan. 7 to Jan. 18, Bank of America boosted the company’s price target from $274 to $300, while Benchmark Co. analysts ticked their price target on the internet-based company from $260 to $310. Goldman Sachs has a rating of $315, whereas Deutsche Bank analysts rate the stock at $305.

Moreover, two major analyst firms have upgraded Amazon this year, including Morgan Stanley, from Equal weight to Overweight, with a price target of $325. Pacific Crest has upgraded the stock from Sector perform to Sector Outperform with a price target of $346.

Of all the ratings in 2013, only two firms rate Amazon at a price below $300 per share: Nomura with $285, and Barclays Capital setting its price target at $245.

Amazon’s Thriving Revenues are Based on Aggressive Pricing

Amazon leads the charts in the e-store business. However, the company’s smart devices unit is trying to challenge an industry dominated by smart devices giant Apple (NASDAQ: AAPL)Barnes & Noble's Nook business is also beginning to flex its muscles after teaming up with Microsoft and Pearson. Apple’s iPads pose the ultimate challenge to Amazon’s Kindle Fire and Kindle Fire HD tablets. This has forced the internet company to resign to price competition as the only viable tool for mounting a challenge in the industry.

Apple’s iDevices trade at a high premium in the market. Apple recently introduced the iPad Mini, which in essence competes with the cheaply-priced tablets from Amazon and Google. However, the 16GB model of the iPad Mini already trades at a premium of 69% of Amazon’s 16GB Kindle Fire tablet. On the positive side, this has helped Amazon to ship a lot of units. However, according to a report published by Bloomberg, Amazon incurs a loss of $10 on every Kindle Fire sold. The company relies on sales from the content unit to bridge the gap.

Amazon's main challenger in the e-store business, eBay (NASDAQ: EBAY), is also looking to up its game after the holiday season. The company also introduced new features such as same day delivery (dubbed eBay Now), and a Pinterest-like interface. Amazon, on the other hand, launched Afterschool.com, a sporting goods site targeted at kids and teens. eBay is also looking to revamp its mobile app to make it look better on tablets. Unlike eBay, Amazon has its own model of tablets, the Kindle Fire, which should give it an edge over the world's second largest online store.

Amazon’s Marginal Trap is a Black Spot

Statistically, Amazon’s margins have been among the worst for any profitable company in its industry. The company’s operating and profit margins have fallen consistently over the last two years. The company now has a trailing 12-month profit margin of about 0.07 percent, while its operating margin stands at 0.93 percent. Amazon’s gross margin is nearly half of Apple’s, as it stands at only 0.24 percent compared to the iPhone maker’s 0.44 percent. eBay has the best gross margin with 0.70 percent, nearly three times Amazon's.

The company’s price to earnings multiple sounds almost ridiculous at 3239.52, compared to Apple’s 11.33. Interestingly, Amazon’s quarterly revenue growth is at par with Apple’s at 0.27 ,as per the most recent quarterly results (Sept. 30, 2012). On the other hand, eBay's trailing 12-month P/E ratio stands at 26.82, but the estimated forward P/E is 16.68. When it comes to stock picking, any investor would be interested in comparing Amazon to eBay before committing his cash.

Additionally, reports suggest that Apple could be forced to revise its pricing on music downloads for iPhone owners who wish to download from their Amazon cloud. This will likely put pressure on Amazon’s revenues as competition settles on an equal footing. Currently, Amazon sells music at about a dollar less than songs cost on iTunes, which gives it a marginal advantage over Apple.

The Bottom Line

Amazon had a great 2012, at least in terms of revenues and share price. The company rallied amid dwindling margins and now seems to be aiming at the $300 mark. However, it remains to be seen whether the company’s poor profitability margins will be the turning point of this rally in 2013. This will also go a long way proving a list of high profile analysts wrong. Remember, there is eBay and Apple in contention for investor alternatives as well, and both have better margins. While Amazon remains the kingpin in the online retail business, profits are essential, and margins are key to sustainable profitability.

 


Nmaithya has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, and eBay. The Motley Fool owns shares of Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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