UBS downgrading Amazon to neutral, cutting est & PT
UBS Investment Research Amazon.com Inc Margin Pressure from Prime Instant Video Downgrading AMZN to Neutral as Prime Video Streaming adds costs While we maintain our long-term thesis that AMZN will continue to dominate eCommerce, taking share from offline / online competitors, we are concerned that a more prolonged investment period – namely due to increased content costs and new distribution deals with hardware providers (game consoles, TV’s, etc) – may pressure margins for longer than originally anticipated. We believe estimates for 2H11 maybe too high, as free subscription streaming was not included in guidance. Our previous thesis of margin expansion in 2H11 may be further out We were forecasting 50 bps and 130 bps of Y/Y margin improvement in Q3 and Q4, respectively – we believe this may no longer be likely given increasing competition for content deals. We note margin is already pressured from continued investment in IT and fulfillment centers. It now looks likely AMZN will need to invest in 1) acquiring content, 2) distribution deals, and 3) technology. We also expect free shipping (4.3% of Q4 rev) to increase alongside Prime membership. We offer five incremental cost scenarios Our sensitivity analysis suggests the new service could impact F11 EPS by $0.41, assuming an incremental $250MM in F11 expenses. Our scenarios provide insight on quarterly and annual EPS impact of add’l $100MM, $250MM, $500MM, $750MM, and $1B in content / distribution costs. See our sensitivity table on p 3. Valuation: Reducing EPS Estimates; PT to $180 We maintain our revenue estimates with the most impact to COGS. We continue to highlight GOOG as a UBS Key Call and our Top Internet pick.