Amazon's streaming plans prompt margin concerns, downgrade

Shares of online retailer slip 2% as USB analyst cuts price target

Shares of online retail giant (NASDAQ: AMZN) were down more than 2 percent late Monday afternoon after a Wall Street analyst downgraded the company's stock and cut its target price. USB analyst Brian Pitz on Monday told clients that the added cost of offering Amazon Prime shipping subscribers free video streaming will put more pressure on the online retailer's already thin operating margins. (Also see: Netflix shares drop as Amazon unveils streaming service) Pitz downgraded Amazon shares to "neutral" from "buy," and also cut his share target price to $180 from $195. By late Monday afternoon, Amazon shares were down 4.18, or 2.4 percent, to 173.06. Amazon's shares also took a hit when the company announced its streaming video plans last Tuesday, falling 3.3 percent to 180.42. Since making the streaming announcement, Amazon has seen its share drop more than 7 percent. And since reaching an all-time high of 191.60 on Jan. 18, Amazon shares are down 9.7 percent through late Monday afternoon. The problem is that Amazon is offering the streaming service to Amazon Prime subscribers who already have paid $79 annually to get free two-day shipping. So the company's not going to generate any new revenue with the streaming service -- at least at first -- but will incur costs. MarketWatch quotes Pitz in his note to investors: “We note margin is already pressured from continued investment in IT and fulfillment centers,” Pitz wrote. “It now looks likely Amazon will need to invest in 1) acquiring content, 2) distribution deals, and 3) technology.” Hence the margin concerns, a lingering concern for Amazon investors made more so by the company's margin guidance last month, which fell far short of consensus estimates.

Chris Nerney writes about the business side of technology market strategies and trends, legal issues, leadership changes, mergers, venture capital, IPOs and technology stocks. Follow him on Twitter @ChrisNerney.

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