Thinning margins suggest Amazon is worth $236

The market is overly optimistic about the online retailer's performance in 2013 and beyond, particularly as competition is increasing.

By Trefis Mar 19, 2013 11:49AM

Senior man using laptop with credit card copyright Image Source, Image Source, Getty ImageslogoA monthly report from ChannelAdvisor suggests a slowdown in sales growth at Amazon (AMZN).


The trend is in contrast to the faith shown by the market in the company, whose stock has touched a high of $282. Trefis has a $236 fair value estimate for Amazon,  around 10% below the current market price.


We believe the market is being overly optimistic about Amazon's performance in 2013 and beyond. The company has cut the prices for its high-margin Web services due to rising competition, which is expected to negatively impact its already thin margins. In October Amazon reported its first quarterly loss in almost a decade and current trends could see this happening again. Below we examine the factors that will make it tough for Amazon to maintain its current stock price.


Sales growth slower than needed for current stock price

If ChannelAdvisor is correct, Amazon's sales growth for Q1 2013 will be below that reported for Q4 2012. Amid an expected slowdown in the U.S. e-retail sector, Amazon will have to win substantial market share from competitors to justify its high market valuation. This will be a tough task as Amazon already dominates online retail and competitors are now willing to match its discounted prices.


Margins to take a hit as Web services prices drop

Facing strong competition from Microsoft (MSFT), Hewlett-Packard (HPQ) and other cloud-service providers, Amazon has been cutting the prices of its Web services, reports Gigaom.com. Amazon had benefited from high margins on these services and strong revenue growth from the segment. (Microsoft owns and publishes Top Stocks, an MSN Money site.)



Amazon Web Services and Other EBITDA MarginThe company operates on thin margins by heavily discounting items it sells and offering services like shipping and video streaming for free. Now that it charges sales tax in eight states and is expected to do so in six more this year, its margins will be under further pressure.

 


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