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The Wall Street firm UBS downgraded shares of Amazon (NASDAQ: AMZN) to Neutral.
The move had an immediate effect on Amazon stock and shares are trading lower on Wednesday by as much as 4%.
The concern for UBS has to do with Amazon Prime subscribers. The recent quarterly results at the online retailer combined with customer surveys suggest that fewer subscribers will renew if Amazon raises the price for the Amazon Prime above the current $79 per annum.
UBS set a new price target for Amazon shares at $375 to $450.
With Amazon trading at $350 per share, that target is fairly meaningless. The bigger news is that Amazon received a downgrade.
It simply doesn’t happen very often for what has become the beacon of the market. The can-do-no-wrong company has earned a ton of respect from the Street . . . so much so a downgrade has become out of the question.
After the UBS downgrade, will others follow?
Valuation with respect to Amazon has long taken a back seat to reality. What matters for the stock is psychology. To the extent one Wall Street firm loses faith, others will do the same simply for not wanting to be the last man standing.
It’s been a dangerous game to be short Amazon. The stock has done nothing but appreciate in value in a major way.
Perhaps now might be the time.
As has been the case for some time, fundamental value at Amazon simply does not exist.
Analysts expect the company to make $1.95 per share in 2014. At current prices, the stock trades for 179 times that number. Amazon trades for just over 2 times sales and 17 times book value.
It’s an expensive stock, plain and simple, and perhaps now under attack.
The big thing I would worry about is competition. Forget about the current known players like traditional brick-and-mortar retailers trying to infringe on Amazon’s chokehold on the Internet.
Best Buy (NYSE: BBY), Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) are all legitimate threats to Amazon, but the real threat might come from overseas.
Earlier this week Chinese online retail giant Alibaba announced that it was taking the first steps to set up an online marketplace in the U.S. The 11 Main site will offer products in the fashion and jewelry space.
That move, in addition to small investments made in the U.S., suggests the company has bigger plans for competing in the U.S.
That should scare Amazon investors holding a stock that is very, very richly priced.
I wouldn’t want to be holding this one when the music stops.