Amazon’s new instant streaming service is a nice bonus for Prime customers, but it might not be so nice for shareholders.UBS analyst Brian Pitz downgraded the stock to neutral with a $180 price target (down from $195) on concerns that the streaming service will raise costs, and hit margins.
Here’s his explanation:
“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 centres. 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.”