Amazon Fire could fizzle

Slim margins and slowing top-line growth have sent shares in US e-commerce giant Amazon (AMZN) down by a fifth since it released its full-year results at the end of January. Sales rose 22 per cent to $74.5bn (£45bn) last year, but pre-tax profits slumped 7 per cent to $506m as the company, which also makes the Kindle e-reader and owns a TV-and-film streaming service, built more warehouses and invested in technology and video content. Shipping losses also spiralled and product-sales growth slowed.

The company is banking on new products to revive sentiment. This month it unveiled Fire TV, a voice-controlled set-top box with which users can watch videos and play games. The technology will provide insight into users' viewing habits, allowing Amazon to tailor its products and services more precisely, and could ultimately become a voice-controlled shopping platform. But it may struggle to gain traction in a crowded market: at $99, it costs the same as competitor Apple TV and more than Google's (GOOG) Chromecast.

Amazon also launched Dash, a stapler-sized device which lets you shop online using voice commands or by scanning bar codes. Although it is only available to customers in a handful of US cities for ordering from Amazon's grocery service, it could eventually be rolled out more broadly.

Telsey Advisory Group says...

Buy. Amazon is our top pick among the internet stocks. Market expectations were too high last year, but now they've overcorrected. Last quarter's figures point to a fantastic holiday season, and sluggish unit growth is probably because Amazon lacks its US ecosystem's robustness overseas.

We believe Amazon can return its operating margin to its high-water mark of 7.1 per cent in the long term. High-margin third-party sales and web services should drive profitability, offsetting razor-thin margins on everything else. We also believe the battle for the living room is wide open, and Fire TV gets Amazon in the game. We retain our $460 price target.

Wedbush Securities says...

Hold. Fire TV is an underwhelming 'me-too' product, and none of the big TV and movie companies will turn over their content to Amazon. The Kindle was the first mover in its industry, but Fire TV is the last mover. Moreover, half of gaming on tablets is already done on the couch in front of the TV, and third-party developers won't make games for its small user base, either.

Although Amazon has been profitably reinvesting in its business, it needs to deliver much more profit before it can justify its stock price. A $400 stock price would imply profits of $20 a share, when we currently expect just $1.07 this year at the pre-tax level. We maintain our $330 price target.