In “The Tech Trade,” Eric Savitz provides details on a downgrade of Amazon.com (AMZN) by UBS. The title seems quite alarming: “Amazon: Streaming Video Will Pressure Margins, UBS Warns.” After I realized UBS was taking its price target from $195 to $180, just above AMZN’s current price of $177, I wondered why this research note warranted such loud alarm bells. AMZN has soared 43% in almost six months, so it seems this warning represents “noise” for AMZN’s share price.
This realization made me wonder what a more positive spin on this downgrade would look like….so, I tried one out. I have paraphrased, sliced, and diced, and reversed Savitz’s piece below:
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Amazon.com (AMZN) is offering streaming video for free to its Amazon Prime customers. This brilliant move to challenge Netflix (NFLX) head-to-head could provide a unique buying opportunity for investors.
On Sunday, UBS analysts Brian Pitz and Brian Fitzgerald slashed AMZN’s rating from “Buy” to “Neutral” and cut their price target by from $195 to $180, projecting less than a 2% gain for the shares in the near future. UBS analysts explained that the potentially high costs of the company’s move into subscription-based streaming could cut the theoretical value of the company by almost 8% in the near-term.
After reading this downgrade with alarm, investors and traders will likely sell AMZN’s shares even though they are already trading under the $180 price target. The remaining 2% upside does not justify the large downside risks of holding shares here. However, investors who still believe in UBS’s long-term thesis that “…AMZN will continue to dominate eCommerce, taking share from offline [and] online competitors” should seize upon the selling to add to positions. Concerns 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” could deliver a unique buying opportunity as the market rushes to further discount shares.
Given that “…a free subscription streaming was not included in guidance” for the second half, the discount on AMZN’s shares should reach some kind of bottom by the July earnings season (all else being equal). UBS has all but assured a buying opportunity will materialize by issuing particularly deep cuts to 2012 EPS forecasts from $5.33 to $4.40 a share. UBS cut its 2011 forecast from $3.48 to $3.07 for 2011.
The technical analysis below points to some potential buying points. Only the second buying opportunity is 8% below current levels, replicating the presumed upside opportunity that was in AMZN shares before the downgrade. Also note the potential double-top in AMZN right below the original $195 price target indicates that the upside UBS originally envisioned has likely already been realized anyway.
Click for a larger view…
*All charts created using TeleChart:
Be careful out there!
Full disclosure: long AMZN calls and long NFLX calls and puts.