Amazon (AMZN) Bear Wipes Egg Off Face, Raises Estimates, Begins Worrying Again

Despite strong Q2 results that beat Street expectations, JP Morgan analyst Imran Khan reiterated his sceptical view on (AMZN), citing expected margin weakness in 2H08. Khan thinks that AMZN’s margins will continue to shrink as a result of shifting product mix and lower prices resulting from management’s desire to bolster top line growth in a weakening economy:

Consolidated gross margins fell 50 bps Y/Y, in-line with our expectations as increased 3rd party sales, better vendor pricing, and higher other revenues in int’l markets slightly offset NA weakness due to cont’d product mix shift, lower pricing, and free shipping offers. We expect this trend to continue as AMZN uses its lowest price position to maintain top-line growth.

Khan raised his FY08 and FY09 EPS estimates of $1.43 and $1.81 to $1.51 and $1.84. Khan reiterates his Neutral rating however, given concerns over margin concerns going forwards and valuation:

AMZN is now trading at 18.6x its F’08E EV/EBITDA, above the large cap peer group ave. of 13.4x. We think future profitability remains a concern and reiterate our Neutral rating as we see limited upside despite strong sales growth.


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