Amazon outlook darkens in the face of rising competition

Reuters News
Posted: Jul 25, 2014 9:21 AM

(Reuters) - Inc's heavy investment in new content and technology to fight off deep-pocketed rivals is proving expensive and analysts fear this will hurt operating earnings for some time.

Shares of the company traded down 12 percent at $315 in premarket trading, as at least 11 brokerages cut their price targets on the stock by as much as $60 to $340-$460.

At least two brokerages downgraded their rating to an equivalent of "hold".

"We are in the early stages of a massive ecosystem war between Apple, Google, Amazon, Microsoft, and possibly others such as Facebook and potentially Alibaba [IPO-BABA.N]," Macquarie Research analyst Ben Schachter said.

"Within that context, it is clear that this ecosystem war is going to be expensive and will impact margins."

Amazon on Thursday forecast an operating loss of between $410 million and $810 million for the third quarter ending September, a sharp increase from a loss of $25 million a year earlier.

Jefferies analysts said Amazon usually gives a fairly conservative outlook and has exceeded its forecast in nine of the past ten quarters.

Amazon is spending billions of dollars expanding its network of warehouses and buying digital content.

The e-commerce giant's new products and businesses unveiled this year include a subscription book service, new digital content for its Prime online video service, a TV streaming-box and the upcoming "Fire" smartphone.

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The company's sharp price cuts for its cloud computing service this year also hurt revenue growth.

"In our view, the company clearly has solid growth prospects for the foreseeable future as it invests in new businesses," BMO Capital Markets analyst Edward Williams said.

"However, heavy spending is hampering profitability in the near term, placing pressure on the margin structure."

(Reporting by Supantha Mukherjee in Bangalore; Editing by Savio D'Souza)