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  • germantrader71 germantrader71 Feb 28, 2011 4:42 AM Flag

    UBS downgrading Amazon to neutral, cutting est & PT

    UBS Investment Research 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.

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