Amazon: Stuck in a Rut

 | May 15, 2014 | 9:30 AM EDT
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Amazon (AMZN) is down 27% from its 52-week high. While I think there is limited downside to the stock, I don't think there is much upside. In my opinion, Amazon is stuck in a rut.

Amazon's undoing came right after the fourth quarter earnings report. The company reported $25.6 billion in revenue, up 20%. But, after management gave less-than-expected guidance for the first quarter, investors ran for the exits. Amazon fell 14% in one day.

The first quarter wasn't much better either. Q1 was a mixed bag. Electronics and other general merchandise (EGM) sales grew, while digital media sales slowed. Digital media grew just 4% to $2.64 billion. International sales grew just 18% to $7.88 billion. Both metrics were disappointing.

Unit sales were up 23% in the first quarter, down from 25% in the fourth quarter and 30% in the first quarter of last year. Operating margins and forward guidance were disappointing as well.

Operating income of $146 million was below expectations, because of substantially higher-than-expected spending. Last year, the company produced $181 million of operating income. Active customers grew just 7 million to 244 million. That was the slowest growth since the second quarter of fiscal 2013.

The consensus estimate right now for the June second quarter is $19.3 billion and a loss of $0.12 a share. At the end of April, management told investors Amazon could lose as much as $455 million in operating income in the second quarter, due to significant investments in infrastructure overseas.

Analysts expect Amazon to spend about $1.2 billion this quarter on infrastructure; that's up 41% over last year. For the year, Amazon is expected to spend $4.4 billion, up 29% on expansion.

I'm afraid that revenue may not be growing fast enough to overcome issues like lack of profitability and heavy spending. At some point, investors have to ask themselves when this spending will pay off. Amazon is the online version of Costco (COST). If it weren't for membership fees, Costco wouldn't have any profits. It's the same with Amazon. Prime members are doing the heavy lifting.

Analysts think Amazon will end the year with sales of $90.8 billion, up 22%. Of the 44 analysts who publish on Amazon, 35 rate the stock a "strong buy" or "buy". Only nine analysts rate the stock "hold". Nobody has a sell on Amazon.

I think Amazon's stock is stuck in a rut until it can slow its capital expenditures. With more states collecting sales tax and Amazon largely dependent on overseas expansion for revenue growth, I think Amazon won't be able to grow revenue fast enough to propel the stock out of a tight range.

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