Amazon upgrade may send mixed signals
Investors can be forgiven for being perplexed about Prudential Securities' "sell" to "hold" upgrade because it would be hard to "hold" a stock you already sold.
Investors searching for any hints of market optimism gave tepid approval to Prudential Securities' upgrade of Amazon.com, even though it only went from a "sell" to a "hold." In Wall Street's world, a "hold" rating is usually a cue to investors to sell shares.
But given the quirky rating system, investors could be forgiven for being a little perplexed about the upgrade. After all, if you took Prudential literally, it would be hard to "hold" a stock that you already sold.
Prudential analyst Mark Rowen cited the online retailer's plan to cooperate with Circuit City on selling electronics goods as a reason for the upgrade.
The deal is similar to one Amazon signed with Toys "R" Us last year. Circuit City will offer items for sale on Amazon that can be picked up at any of its more than 600 retail stores. Amazon will handle online order processing and payment and will get a percentage of the revenue from online sales.
The upgrade seemed to damn Amazon with faint praise, however, with Rowen applauding the creation of a "face-saving escape hatch" for Amazon if the company is not able to turn its own electronics business around.
"This agreement may signify that Amazon is finally addressing concerns regarding its negative-contribution-margin consumer electronics business," Rowen wrote in a research note.
Rowen raised his target price on the stock from $9 to $10. Amazon shares were up 10 cents to $10.50 in midday trading.
Amazon could serve as a case study in the fickleness of Wall Street's attitude toward Internet companies. Once a Wall Street darling, its fortunes have fallen along with the Nasdaq.
Prudential, for instance, lowered its rating on the stock from "strong buy" to "hold" in July 2000, and dropped it to an almost-unheard-of "sell" in February.
Other analysts made comments about Amazon's pact with Circuit City, but disagreed with Rowen about the positive implications.
U.S. Bancorp Piper Jaffray analyst Safa Rashtchy said the deal between the two retailers is "troubling overall, since it fails to leverage the core competencies of Amazon, signaling to us that a more integrated or strategically significant deal could not be reached."
Rashtchy said he was cautious because Amazon's revenue growth may suffer because of the Circuit City deal, even though it may move the e-tailer closer to profitability.
Nevertheless, Rashtchy maintained his "buy" rating.