Wednesday, July 26, 2006

Color on quarter: (AMZN)

- Several firms commenting AMZN results with the emphasis on disappointing profitability:

* Prudential notes that profit margins deteriorated precipitously in the quarter, due to increased spending on technology, free shipping, a product mix shift, as well as $20 million of costs associated with the termination of the contract. The company raised its FY'06 revenue guidance, but lowered its operating income guidance by $80 million. Firm is taking its numbers down and lowering price tgt to $25 from $30. Reiterates Underweight.

* Goldman Sachs notes that Amazon reduced its operating profit guidance by 15% including Toys R Us and by ~7% excluding Toys R Us, which appears to be a departure from a return to double-digit incremental operating margin. This apparent increased investment vs. the prior plan likely eliminates what could have developed into a potentially more constructive view if the shares reached the low $30s. As such, our thesis remains relatively unchanged. They believe Amazon valuation remains ahead of its fundamentals, while the company needs to resolve several company-specific issues (i.e., its proprietary toy offering as well as its digital strategy) and simultaneously show stronger incremental margins before we can consider becoming more positive on the stock.

* Citigroup says they are more negative. Revenue and unit trends are robust, but the growth is coming at increased cost. Excl. TRUS impact, N. America gross margin down 60 bps Y/Y and International gross margin down 130 bps Y/Y. Increasingly aggressive pricing and shipping promotions are the culprits. Still no clear signs of ROI on all that Tech & Content spend.

Notablecalls: Anyone still doubting that AMZN has became just an usual retailer instead of high-growth internet company? The question is, when will the valuation reflect this. Todays sharp decline will surely take it closer there.

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