Amazon.com got hit by a rare downgrade on Wednesday, and the shares reacted as shares will in a jittery market: They fell nearly 3.5% to $349.25.
In fact, 2014 has started out badly for Amazon shares. After basically treading water at the beginning of January, they peaked intraday at $408.06 on Jan. 22.
With Wednesday’s close, the shares are down 14.4% from the peak and 12.4% on the year.
Out of 31 trading days this year, Amazon has seen 18 down days. It’s the 27th-worst performer among stocks in the Standard & Poor’s 500 Index and sixth-worst performer among Nasdaq-100 stocks.
They’re looking a bit like Apple's shares after their September 2012 peak.
The downgrade by UBS analyst Eric Sheridan is only part of the problem Amazon shares face. Sheridan downgraded the shares because of a survey UBS commissioned to see how Amazon Prime customers would react to a price increase. Amazon Prime is the premium service, offered for $79 a year. That gets the customer free shipping, access to its new video productions and other services.
The free shipping is costing Amazon a lot of money, which is why company officials started to talk about boosting the subscription fee.
The UBS survey suggested customers wouldn’t renew if the annual subscription were boosted $20 to $99 or $40 to $119. At $119, less than a quarter of Premier customers wouldn’t renew.
Other problems pressuring the stock:
- Disappointments in the guidance in its fourth-quarter earnings report. It estimated revenue for the first quarter at $18.2 billion to $19.9 billion; the consensus estimate at the time was $19.7 billion. It’s dropped down to $19.4 billion. The company saw earnings before interest and taxes ranging from negative $200 million to plus $200 million. Reuters said the consensus was $397 million.
- The oddity of Amazon.com. It generates huge amounts of revenue and makes little in the way of profit — and squeezes competitors ruthlessly, as legions of retailers can attest. Of course, that’s always been CEO Jeff Bezos’ strategy.
- The bubble for Amazon shares looks to have been pierced after a big-time ride. The shares jumped nearly 59% in 2013 after a 45% gain in 2012. From their post-2008 crash low of $78.14 through the January peak, the shares soared 422%; they’re up ONLY 347% now.
To sure, Amazon and Apple, for that matter, are historically volatile stocks. So a big blow-off for Amazon’s shares shouldn’t surprise. (The Apple crash shouldn’t have surprised anyone either.)
Amazon shares have found a little support at around $340. Should they drop below that level, the next strong support looks like $300 and then $280.
The 14-day relative strength index on the stock is around 30, which says it’s close to being oversold on a short term basis. That’s good. The RSI had reached as high as 76 in November. That means way overbought.
But the stock’s price/earnings ratio is problematic: nearly 600 on a trailing 12-month basis and 55 on a forward 12-month basis. In other words, even after a 14% price decline, a new investor is paying a lot for great revenue growth but paltry earnings.
Apple shares fell more than 45% between the September 2012 peak and the $385.10 low in April 2013. That’s the benchmark to watch. That’s what investors, including Carl Icahn, saw. The shares have risen 39% since.
If Amazon shares fall as much as Apple did, then, like Apple, they may well become a screaming buy.