While many analysts and experts are predicting Amazon.com, Inc. AMZN will boast a $1 trillion valuation, analysts at Raymond James are taking a step back.
Raymond James' Aaron Kessler downgraded shares of Amazon from Outperform to Market Perform while removing a $925 price target under the belief that shares are now fairly valued after a 21 percent gain since the start of 2017.
Dissecting The Downgrade?
According to Kessler, Amazon's investment levels are expected to remain "elevated" in the near term from initiatives including fulfillment centers, the recent NFL deal, Prime services, Alexa and Echo investments, and an expansion in India.
Also, expectations for a margin improvement in the back-end of 2017 is already reflected in Amazon's stock.
Finally, Kessler noted that Amazon's AWS segment announced a total of seven price cuts time for December 1 and is could limit upside throughout the first quarter of 2017. While the analyst believes the Street's 43 percent revenue growth for the AWS segment (versus 47 percent in the fourth quarter) is "reasonable," upside to CSOI will likely be limited. Also, increasing competition from other providers such as Google ((parent company, NASDAQ:GOOG) GOOGL) will also weigh on Amazon's AWS multiple.
Bottom line, Kessler believes Amazon needs to show investors: 1) greater operating leverage, 2) improved margins, 3) less losses in international, 4) improvements in shipping costs and 5) improvements in Prime Video adoption given a global roll-out and evidence of return on invested capital.
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