Prudential slaps "sell" rating on Amazon
Prudential Securities issues a rare "sell" rating on the online retailer's stock, based on iffy prospects for the company's expansion into new businesses.
Shares of the online retailer dropped 19 cents to $14.44 in morning Nasdaq trading. The stock is nearing a 52-week low, and has traded as high as $76.19 in the last year.
Analyst Mark Rowen at Prudential Securities lowered the company's rating to "sell" from "buy" and slashed his 12-month price target to $9 from $20 a share.
The crux of Rowen's analysis was the Seattle-based company's equity valuation. He warned investors that Amazon shares could still fall even though they are trading off 87 percent from its all-time high.
"We believe that a rational valuation approach to (Amazon) reveals a significant downside risk to equity holders," the analyst wrote in a research note. "In our opinion, the risk outweighs the upside potential."
Of chief concern to the analyst was Amazon's "anemic" growth within its books, music and video business--the company's most mature and only profitable business segment.
According to Rowen, after incorporating revenue estimates for the segment and recognizing debt and on-hand cash, the e-tailer's book, music and video business accounts for only 50 percent of the company's value. The remaining "early-stage" business segments--made up of consumer electronics sales and a few other product categories--are money-losers that do not justify current valuation levels, according to the analyst.
Rowen opined that in a "best-case scenario," the company could be valued at $62 a share, but a "worst-case scenario"--in which growth falters and an operating break-even level is achieved more slowly than expected--the company could have little to no value. The analyst adopted a middle-road approach, pegging the target price at between $6 and $10 a share.
The analyst also weighed in on the debate surrounding the company's credit situation. Recently, Lehman Brothers analyst Ravi Suria, one of Amazon's toughest critics, argued that the the company would face the eventual stoppage of shipments from vendors once creditors stop lending based on the company's working capital.
Suria's analysis drew a hail of responses, most notably from Merrill Lynch analyst Henry Blodget, who said that decelerating revenue growth, and not negative working capital, was the real issue for the company.
Rowen came down on the side of Blodget and others, noting that while Suria's scenario was possible, it was unlikely.
"In our opinion, the history of retail shows that retailers generally experience cash flow and working capital problems when they commit to inventory that they are later unable to sell," Rowen wrote. "However, since (Amazon) off-loaded toy inventory risk to Toys "R" Us, it has extremely low inventory risk exposure".