Don't Let Amazon's Near-Term Headwinds Cloud Its Long-Term Growth

Amazon.com, Inc. AMZN's long-term growth story is far from over, but the same thinking isn't necessarily true for its stock, at least according to UBS' Eric Sheridan.

In a research report published on Friday following Amazon's third quarter results, Sheridan noted that Amazon's stock has gained more than 20 percent year-to-date and more than 70 percent since its February lows. As such, the company's mixed third quarter results could put a dent in the stock's momentum.

Sheridan continued that his long-term view on Amazon's business remains intact. Specifically, the analyst is most bullish on the continued adoption in e-commerce across the world, continued strength in Prime and a sustained leadership position in the cloud. However, Amazon's short-term uptick in investment plans through the first half of next year does re-focus investor attention on the necessary capital the company needs to spend to address its long-term revenue opportunities.

As an example of higher investment spend, Amazon is now pushing its Prime membership in China to better compete against Alibaba Group Holding Ltd BABA.

"We now expect the key investor debate on Amazon to shift to the slope of operating margins from Q4'16 into 2017 in order to better determine the depth/length of investments needed to support growth," Sheridan wrote.

Estimate Revisions

Given Amazon's planned spending the analyst made some changes to his estimates.

For the fourth quarter, the analyst is now projecting Amazon's gross margins to fall to 32.9 percent from 33.2 percent and CSOI (consolidated segment operating income) to now be $2.0 billion from a previous $2.3 billion.

For the full fiscal year, the analyst also lowered his gross margin estimates to 34.8 percent from a previous 35 percent and lowered his CSOI estimate to $7.2 billion from $7.7 billion.

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