Amazon shares give up 2011 gains on profit concern

Stock Market Predictions

(Global Markets) - Amazon.com Inc shares dropped to levels not seen since March Wednesday on concern that big spending and aggressive pricing by the No. 1 Internet retailer will hit profit during the crucial holiday season and well into next year.

The shares slipped 30 cents to close at $180.21, but touched $170.25 earlier in the day. That put the stock at the lowest level since late March and left it in negative territory for the year.

As recently as mid-October, the shares hit a record $246.71, up more than 35 percent for the year to date.

Since then, Amazon has launched its Kindle Fire tablet at a $199 price point, which IHS iSuppli and other computer industry analysis firms estimate is close to cost.

The Fire has received a lot of negative reviews, but most analysts expect sales to be very strong. While that may be positive for Amazon's long-term goal of selling more digital content, profit will be pressured in the short term.

"There's a lot of concern about how profitable this company can be," said RJ Hottovy, an equity analyst at Morningstar.

He expects Amazon to sell at least 5 million Kindle Fire tablets in the fourth quarter and is considering raising that estimate.

"With the Kindle Fire selling so well, that means additional margin pressure," the analyst said.

Since the middle of November, when Amazon started shipping the Kindle Fire, shares of the company are down more than 20 percent. Stock of eBay, a big e-commerce rival, are down less than 5 percent in the same period, while the Nasdaq Composite Index has lost 4.9 percent.

In addition to the Kindle Fire launch, Amazon is investing heavily in digital content, such as movies and TV shows, and new distribution centers to support its fast-growing online retail business.

"There's also concern about how long it will take for all these investments to pay off, or whether they will pay off," Hottovy said.

BEST BUY COMPETITION

Concern about Amazon profit was exacerbated this week when Best Buy Co reported lower-than-expected earnings, hurt by heavy promotional activity this holiday season.

Amazon competes with Best Buy on sales of consumer electronics, and the Internet giant is known to aggressively match or beat rivals' prices, according to Chad Bartley, an analyst at Pacific Crest Securities.

"Best Buy's online business did significantly better than its traditional business, a sign that e-commerce continues to take market share," Bartley said.

"On the negative side, Best Buy results make it clear there's a lot of discounting this holiday," the analyst added.

In the past seven weeks, Amazon's consumer electronics prices averaged 9 percent to 10 percent lower than the average on leading e-commerce websites, including those run by Best Buy, Costco, Target, and Wal-Mart, according to Goldman Sachs data.

GOLDMAN WARNING

On Tuesday, Goldman Sachs analysts, led by Heather Bellini, warned that Amazon earnings estimates are probably too high for 2012.

The Goldman analysts forecast earnings per share of $1.42 next year, well below analysts' average estimate of more than $2 a share.

Amazon's current share price is based on assumptions that earnings per share will climb next year from low levels at the end of this year, the analysts added.

"For the stock to materially appreciate in the near term would require the company to beat and raise on the bottom line over the next few quarters," Bellini and her colleagues wrote. "Given our lower operating forecasts for 2012, we see this scenario as unlikely."

(Reporting by Alistair Barr; editing by John Wallace)

(Corrects share price performance in first and second paragraphs)