Growth concerns dog Amazon as it shores up digital beachhead

Fri Apr 26, 2013 2:37pm EDT
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By Alistair Barr and Ben Berkowitz

SAN FRANCISCO/NEW YORK (Reuters) - 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 improves.

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 top-line deceleration.

"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."   Continued...

A worker carries packages for shipment at the Amazon warehouse in Leipzig, December 3, 2008. REUTERS/Fabrizio Bensch