StockBeat – Amazon Shrugs of Valuation Warning From Analyst

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Investing.com – Amazon (NASDAQ:) is up roughly 20% for the year, but one analyst has grown wary of the e-commerce giant warning that its valuation is frothy as another cycle of costly investments and compressed margins in its cloud business in the year ahead will stifle earnings growth.

Investing.com – Pivotal Research cut its price target on Amazon.com to $2,100 from $2,500 Tuesday after lowering its growth estimates for the tech giant. Pivotal analyst Michael Levine questioned if the company can meet analysts’ somewhat lofty growth estimates at a time when its retail gross profit has slowed and its cloud business, Amazon Web Services (or AWS) has slumped.

The new target is in line with the consensus 12-month target of 48 analysts tracked by Investing.com. That target is about $2,150, which implies an upside of about 20%.

Privotal is projecting {{0|Amazon.com]] will earn $4.11 per share in the fourth quarter, a touch ahead of the $4.08 consensus fourth-quarter estimate of analysts compiled by Investing.com. That would be down from $6.04 a share in the 2018 fourth quarter. Revenue is projected to rise about 18.8% to nearly $86 billion.

Amazon.com (NASDAQ:) was up more than 1% on the day Tuesday afternoon. The market values the stock fairly richly. Its forward price-earnings ratio is 65.

“We are cutting our target multiples. Enterprise value/gross merchandise value on retail goes to 1x from 1.25x and our AWS multiple goes to 15x EV/EBITDA, down from 17.5x,” Pivitol said. “We believe 1Q20 –the next catalyst along with 4Q19 earnings– is clearly modeled too high.”

Pivotal did recognize, however, that growth will likely return in the second quarter of 2020 thanks to the introduction of one-day shipping and a slowdown in the pace of margin decline, but the firm said it is “not clear to that the bounce back will be as strong as people expect.”

With its rollout of its one-day Prime shipping program across the U.S. underway and plans to expand the concept globally, Amazon.com could elevate shipping costs as well as generate a new investment cycle in fulfillment center capacity, Pivotal added.

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