* Amazon may lose its growth-stock luster -analyst
* Profit margins improve, but shares still richly valued
* Amazon faces overseas growth challenges, especially in
* Traditional retailers losing less share to Amazon -analyst
(Adds analysts' comments, details on digital strategy, updates
By Alistair Barr and Ben Berkowitz
SAN FRANCISCO/NEW YORK, April 26 Amazon.com
Inc's stock sank 6 percent on Friday as a poor
financial outlook revived concerns about whether the company can
sustain its torrid pace of expansion while profitability
The world's largest Internet retailer on Thursday reported
its highest gross profit margins in a decade as years of
spending on high-margin businesses, from digital media to cloud
services, began to pay off. But slower revenue growth and a
disappointing outlook for this quarter exacerbated uncertainty
about the its business beyond the United States.
Amazon faces a sluggish European economy and has had
inconsistent success breaking into emerging markets such as
China, where competition from the likes of Alibaba is intense.
Year-over-year unit growth, which measures the number of
items Amazon sells, was 30 percent in the first quarter, down
from 49 percent in the first quarter of 2012.
As growth concerns worsen, the company will have trouble
justifying its triple-digit price-earnings multiple. Analysts at
J.P. Morgan, Credit Suisse and Pacific Crest Securities on
Friday lowered their price targets on Amazon shares, citing the
"As unit growth decelerates, does Amazon stop being a growth
stock and start becoming growth-at-a-reasonable price?" said one
analyst, who requested anonymity. "Margins are coming up but
they are still pretty low, so there's not much support for an
earnings multiple valuation."
The analyst did not want to be identified because these
concerns are based on a worst-case scenario for Amazon.
"That's not my base case but that's the concern," the
analyst added. "The stock could be stuck between $250 and $280."
Longer-term, investors are keeping a close eye on a
fundamental shift in its business.
The Internet retail giant that once specialized in moving
books and other physical items quickly is increasingly trying to
do the same in the digital world, where profit margins are
higher, partly because e-books, music and video files and are
transmitted electronically at high speed.
It has diversified aggressively into other revenue streams
like digital content, advertising and the Amazon Web Services
cloud computing business. Lately, it has even branched into
creating original video content.
Throw in a fast-expanding third-party merchant business,
where Amazon books a cut of sales from seller listings on its
website, and the long-term margin outlook looks solid.
"Over the long term it does help margins," said Ben
Schachter, an analyst at Macquarie. "You don't have to put these
things on a truck and ship them."
ROOM TO MOVE
In the first quarter, net shipping costs stood at 4.7
percent of sales, down from 5.1 percent a year earlier.
"What we're seeing is that Amazon is really getting leverage
from shipping costs. AWS is becoming a big part of their mix.
They are also benefiting from a greater mix of advertising
revenues. We'll continue to see that improve," said Victor
Anthony, an analyst at Topeka Capital Markets.
But its brick-and-mortar rivals are catching on, in many
cases borrowing pages from Amazon's pioneering e-commerce
"Amazon's now growing at about 2x eCommerce, compared to 3x
a year ago," Doug Anmuth, an analyst at J.P. Morgan, wrote in a
note to investors following the company's results.
Retailers are losing less market share to Amazon than they
used to as they increase selection online, price-match more
aggressively, and work to combat showrooming, Anmuth argued.
Shares of Best Buy Co and HH Gregg Inc,
electronic retailers that have been particularly hard hit by
Amazon competition, have doubled so far this year.
Amazon shares are up 1.5 percent this year, while Wal-Mart
Stores Inc and Target Corp are up about 16
percent and 20 percent, respectively.
Despite declines, Amazon shares still trade at about 100
times 2013 estimated earnings and 75 times 2014 forecast profit.
Even on a more-forgiving valuation method, Amazon shares are
expensive. The stock trades at about 20 times earnings, before
interest, tax, depreciation and amortization, or EBITDA. Google
Inc trades at about 10 times EBITDA and eBay Inc
trades at 11 to 12 times EBITDA.
Amazon will need to pump out higher earnings in the future
to support such valuations, especially if growth rates continue
to slide, analysts said.
The company's gross profit margin hit a better-than-expected
26.6 percent in the first quarter, up from 24 percent a year
Still, one major source of recent profit growth, Amazon's
online marketplace for third-party sellers, known as 3P, stalled
in early 2013.
First-quarter 3P unit growth was 33 percent, down from a 40
percent growth rate in the first quarter of 2012, according to
Ken Sena, an analyst at Evercore Partners.
Amazon's retail business, known as 1P, buys products at bulk
prices and sells them at higher prices, collecting the
difference as profit and recording the sale price as revenue.
In a 3P transaction, Amazon books commissions from
third-party sales on its marketplace as revenue. That revenue is
almost all profit, so as the 3P business has grown, Amazon's
gross profit margins have expanded.
The slowdown in 3P growth during the first quarter "has some
concerned that the gross margin leverage story may be nearing
its end," Sena said.
Amazon shares were down 6.3 percent at $257.36 on Friday
afternoon on the Nasdaq, off an earlier low at $252.81.
(Writing by Ben Berkowitz; editing by Edwin Chan, Lisa Shumaker
and Matthew Lewis)