Shares of e-commerce giant Amazon.com (AMZN: Charts, News) surged yesterday, after Morgan Stanley analysts. Led by Scott Devitt upgraded the stock from equal-weight to overweight, stating that investors are underestimating the company’s growth potential in China and emerging markets.
The firm believes that Amazon’s expensive expansion into emerging markets may hurt its fiscal 2013 earnings, but it will pay off in the long term. A report that Amazon’s Kindle Fire tablet was cutting into iPad sales was also encouraging for Amazon investors.
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Devitt pegged Amazon’s price target at $325, stating, “The market may be underestimating the sustainability of Amazon.com’s international sales growth.” He points to the payment infrastructures of Brazil and Russia, noting that both countries had comparatively low credit card usage penetration. If credit card adoption increases along with rising Internet usage, then e-commerce in BRIC nations and emerging markets could rise substantially.
Amazon, which is expanding aggressively into BRIC nations, definitely believes this forecast. However, Devitt warns of the “all-in” nature of Amazon’s expansion plans, which have dragged on earnings and cash flow over the past year. Devitt is especially cautious regarding Brazil’s market. “Market opportunities such as Brazil are complex and not without risk,” he noted.
Amazon’s Brazilian website does not sell any physical items, only digital ones – such as e-books and digital downloads. It only officially released the Kindle Fire in Brazil last month, but it is sold through two electronic retailers – Pontofrio.com.br and Livraria da Vila – and not its own website.
Amazon’s expansion into China, which started with its $75 million acquisition of Chinese e-commerce site Joyo.com, is also fraught with risk and uncertainties. The Chinese e-commerce market is currently dominated by Taobao Mall, nicknamed the “eBay of China.” Taobao is a subsidiary of Chinese Internet giant Alibaba Group, which controls approximately 80% of Internet auction activities in the country.
Another company, 360buy, controls half of China’s business-to-consumer online market, and is Amazon’s true competitor, since it does not offer auctions. Amazon China only controls 7% of this market. However, the company has hinted at an upcoming Chinese release of the Kindle, since Kindle apps started appearing on Amazon China’s website last week. The Kindle Fire might turn things around in China, boosting digital sales as they have in America.
Back in North America, the Kindle Fire’s market share rose 3.03% to claim 7.51% of the tablet market, while the Apple (AAPL: Charts, News) iPad’s (all versions) market share dropped 7.14% to 78.86%. The Kindle Fire is the second best-selling tablet in the region, and remains ahead of the Samsung Galaxy Tab series, which gained 1.38% to claim 4.39% of the market. The Kindle Fire was also the best-selling tablet on Black Friday.
The Kindle Fire’s main appeal is its low price tags of $299 (8.9-inch HD version) and $199 (7-inch HD version). Amazon takes a slight loss on each Kindle Fire sold, expecting to make up the revenue with digital sales of e-books, apps and videos. The Kindle Fire also encourages physical purchases through its Amazon.com website with its one-click purchases, since Kindle Fire devices must be synced to an active Amazon account with a valid credit card.
So far, this strategy has been tremendously successful, and has caused big box retailers such as Best Buy (BBY: Charts, News) and Target (TGT: Charts, News) to stop selling the Kindle Fire altogether, since many shoppers were simply using their stores as showrooms for later online purchases from Amazon.
Last quarter, Amazon reported a loss of $274 million on revenue of $13.18 billion, missing analyst estimates on both its top and bottom lines. It was also the first time in four years that Amazon posted a quarterly loss. The company attributed $169 million of its losses to a poorly timed investment in Groupon (GRPN: Charts, News) competitor Living Social.
Although Amazon investors have grown accustomed to lower earnings due to increased long-term investments, investors should watch the company’s next earnings announcement on January 31 for more hints at its future plans for its BRIC markets, specifically its progress against the Chinese heavyweights. Amazon currently trades at 153.8 times forward earnings – making it one of the most expensive mature tech stocks in the market – and does pay a quarterly dividend.
Other News About AMZN
Apple iPad Loses its Shares Against Amazon’s Kindle Fire Tablets
Kindle Fire continues to dominate tablet sales.
Morgan Stanley Upgrades Amazon.com to Overweight
Amazon surges on a big upgrade from Morgan Stanley.
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Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.
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