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One-Day Shipping Pain Worth It For Amazon's Long-Term Gain

Dave Royse

Amazon.com, Inc.'s (NASDAQ: AMZN) stock dropped on Friday after it issued weaker-than-expected guidance for the upcoming holiday season, but analysts remained bullish on the company and its one-day shipping buildout efforts.

Amazon's third-quarter results were mixed, with earnings missing Street estimates, but sales coming in slightly ahead of expectations.

But it was the fourth-quarter guidance that was getting most of the attention, as the e-commerce giant put out revenue and operating income forecasts below street expectations. The operating income guidance reflected continued aggressive investments in its one-day shipping rollout.

The Analysts

Morgan Stanley’s Brian Nowak kept an Overweight rating on Amazon, but lowered the price target from $2,200 to $2100.

KeyBanc’s Edward Yruma kept an Overweight rating on the stock with a $2,200 price target.

Raymond James' Aaron Kessler lowered the price target from $2,080 to $2,020, but kept an Outperform rating on the stock.

Tigress Financial’s Ivan Feinseth kept a Buy rating on Amazon.

See Also: Jeff Bezos Could Lose Title Of World's Richest Person After Amazon's Earnings Miss

The Theses

While acknowledging the lowered expectations, several analysts said one-day delivery demand has been higher than expected, and Amazon is getting better and better at it, even though it is costing them in spending terms in the short term.

"1 day pain, check – 1 day gains, ahead,” Nowak wrote in a note. "Our analyses show how 1-day efficiency improved dramatically in 3Q, key to long term."

Yruma noted that consumer reception to the quick delivery option has been strong, and that its ability to offer one-day on a broad assortment of goods differentiates Amazon from competitors. While it's driving higher transportation costs, "we think that AMZN is uniquely positioned to offer 1-day on a long-tail assortment," Yruma wrote.

View more earnings on AMZN

Several analysts said the spending is worth it.

What They Do

"That's what they do ... they invest," Fitch Solutions senior analyst Dexter Thillien said on CNBC, making the sell-off after the print surprising.

"I think this is something that over time the return on investment will be quite justified," added CFRA Research analyst Tuna Amobi.

One contrarian was Shawn Cruz, senior trading specialist at TD Ameritrade, who said that after holding competitors' feet to the fire for so long, "they’re starting to get burned themselves.

"If they’re going to try and keep up with this one-day shipping process, how much is it going to cost them during the holiday shopping season?" Cruz asked. "That’s going make last quarter look like a walk in the park."

Other Businesses

But Kessler noted Amazon should lap the one-day investments next year, and in the meantime, other parts of the business, including its AWS Cloud service and its advertising business remain strong.

Feinseth agreed and said the weaker guidance presents a buying opportunity.

"Amazon continues excel in every business line," Feinseth wrote, noting that revenue was up year-over-year and the company continues to grow.

"Share price weakness due to a good but not good enough quarter creates a buying opportunity."

Price Action

Amazon shares were down on Friday by 1.2% to $1,758.34. The stock opened at the low of day around $1,698 per share.

Latest Ratings for AMZN

Date Firm Action From To
Oct 2019 Maintains Market Outperform
Oct 2019 Maintains Buy
Oct 2019 Maintains Outperform

View More Analyst Ratings for AMZN
View the Latest Analyst Ratings

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