Credit Suisse's Stephen Ju highlights three long-term positive factors, but sees issues in near-term margins

Published By: Eunice Gettys on January 11, 2017 12:12 pm EST

Most of the analysts at Wall Street are bullish on Amazon.com, Inc. (NASDAQ:AMZN) over its growth prospects in core retail, cloud services, and other newer businesses. However, Credit Suisse is concerned about the company’s heavy spending and expects it to affect the stock price.

Stephen Ju, an analyst at the research firm, published a research report Wednesday, maintaining its Outperform rating on the stock; however, he reduced his price target from $1,000 to $950, which represents a potential upside of 19% over the last closing price. On Tuesday, Amazon shares edged down and closed the market at $795.90.

Amazon is scheduled to publish fourth quarter of fiscal year 2016 (4QFY16) results as well as 1QFY17 guidance on January 26. From a tactical perspective over the short term, Mr. Ju believes that the company will guide “trough” consolidated segment operating income (CSOI) margin for the current period. He explained that the online retailer has formed a pattern of spending in either data centers or fulfilment centers, and of expanding into the large infrastructure.

Other than that, the research firm remains positive over the company and the stock, and its updated investment thesis on Amazon stock is based on three long-term factors. First, Credit Suisse expects Amazon to re-establish its “ecommerce segment operating margin expansion,” as it expands into larger infrastructure. Second, the research firm sees the persistent margin benefit spurred by moderation of shipping loss. The company reported that it has incurred a shipping loss of $3.3 billion during the Holiday Season when it hired 70,000 part-time employees for its busy fulfilment centers. The loss shows a huge increase from $1.85 billion reported for 4QFY15.

Third, Mr. Ju believes that capital intensity to operate Amazon Web Service (AWS), the company’s cloud service division, is gradually stabilizing, as he estimates usage rates have fallen below 100%. This is expected to lead to neutralizing nominal capital expenditure in terms of dollars, even those purchased through capital lease and expansion of free cash flow.