Fund managers focus on Prime memberships to gauge Amazon rally

Fri Oct 21, 2016 3:39pm EDT
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By David Randall

NEW YORK (Reuters) - The strength of Inc's nearly 75 percent rally since February may depend on how many more brown cardboard boxes end up on the doorsteps of U.S. consumers this fall.

The share price surge of the internet-based retailer and cloud services company since the market sell-off at the beginning of the year has far outpaced the other so-called FANG stocks of Facebook Inc, Netflix Inc, and Google-parent Alphabet Inc that led the broad U.S. market in 2015.

Yet some fund managers and analysts say that's lofty upward trend is leaving the stock primed for a significant tumble should it not exceed high expectations for growth in its Prime subscription service, which jumped 50 percent last year.

"This stock is priced for perfection, and if they deliver merely perfection it will go down," in the short-term, said Michael Pachter, an analyst at Wedbush Securities in Los Angeles. "I would be cautious about trading into their earnings," he said, adding that he thinks that the stock will be worth more than it is currently a year from now.

The company reports quarterly results on Oct. 27, and is expected to post a 28.9 percent growth in revenues, to $32.6 billion and a 370.4 percent increase in earnings per share, to $0.80, according to Thomson Reuters data.

Amazon Prime customers tend to be wealthier, younger and spend approximately $2,500 on the site per year, a level approximately 4.5 times greater than non-members, according to Morgan Stanley.

The company is focused on grabbing more of these customer's overall spending by moving them into Amazon's low-margin grocery stores and other bricks-and-mortar retail locations. But that strategy could backfire, eating into profits at a time when many investors are expecting Amazon to post significant earnings growth.

Short interest, a measure of how many investors are betting that the stock will go down, is up 36 percent, to $4.1 billion, from its average last year, according to Ihor Dusaniwsky, head of research at financial analytics firm S3 Partners.   Continued...

Amazon boxes are seen stacked for delivery in the Manhattan borough of New York City, January 29, 2016. REUTERS/Mike Segar/File Photo