Bernstein Cuts Amazon's Target To $770 And Asks 'Is The Pain Worth The Gain?'

Bernstein analyst Carlos Kirjner cut the price target on Amazon.com, Inc. AMZN shares by $30 to $770. The analyst also trimmed his 2016 and 2017 earnings estimate of the e-commerce giant due to a mix shift in the first party business that is impacting the gross margin.

Amazon's Q4 results were mixed with a margin miss and revenue beat. Kirjner said the gross margin of the first party business, which, according to his analysis, showed a year-over-year decline in Q4, after expanding for several quarters. Kirjner cut his 2016 cash EPS estimate to $7.62 from $11.92, and 2017 EPS view to $12.56 from $17.93.

"We are lowering our 2016 and 2017 estimates to reflect the worse-than-expected 1P gross margin trajectory, which we suspect may have been driven by an adverse mix shift, which (if our suspicion is correct) may not be as severe in the next several quarters," the analyst wrote in a note to clients.

Retail

However, Kirjner said his two tenets of Amazon investment case remain intact. Amazon's Web Service (AWS) is the leading player in a fast growing market with great potential that will be dominated by at most three competitors, hence supporting attractive steady-state margins and returns.

The analyst also noted that Amazon retail business is more cost-efficient that brick-and-mortar retail and hence supports better margins and returns on a normalized basis.

"We continue to believe the Street underestimates the long-term growth and profitability potential of the business, both for the retail business and for AWS. We also believe the recent price increases for FBA will have significant impact on profits and margins and is currently not reflected in consensus," said Kirjner who has an Outperform rating on AMZN stock.

Shares are down 18 percent this year, while the broader S&P 500 dropped 5 percent in the same period.