Amazon (AMZN) Drops; Morgan Stanley Cuts to Equalweight, Cites Competition from Apple (AAPL)

Amazon.com (Nasdaq: AMZN) is taking a hit Thursday following a downgrade at Morgan Stanley.

The first lowered its investment rating from Overweight to an Equalweight, cutting its price target 13.6 percent from $220 prior to $190. Despite the lowered target, Morgan Stanley said it would be a buyer as share approached $150, a single multiple of expected 2012 net sales.

Morgan Stanley cautions that 2012 will be a tough year and investors will get the full just of this when it holds its first-quarter conference call. The call will give sales guidance for the second-quarter which will be facing tougher comps (up 44 percent) compared to its first quarter numbers. First-quarter sales should have easier comps given a 500 basis points impact from the earthquake/tsunami in Japan last March.

Key points to deceleration of revs include:

1. Apple (Nasdaq: AAPL) having a significant impact on Amazon's EGM segment;
   
   
2. Apple and other driving a meaningful shift in the Media sector, putting pressure on Amazon's non-book media business;
   
   
3. Video games are entering a cyclically weak period;
   
   
4. The transition to 3P / FBA is being driven partially by the transition of eBooks to net sales accounting and while positive long-term, we do not think physical goods 3P is growing as fast as some investors believe; and
   
   
5. Slowing sales growth and an overall shift to more 3P and digital goods may change the dynamics of working capital, a significant component of consolidated FCF that most investors currently capitalize at the same multiple as Amazon.com’s operating FCF

In EGM, Amazon reported North American sales growth of 27 percent in the fourth-quarter, from 44 percent in the third-quarter last year. Amazon doesn't have a license to sell Apple's iPhone and iPad devices, leaving it with a gap in its electronics portfolio. Morgan Stanley notes: "the EGM deceleration is more significant [than Media] since it is the segment that investors expect the most share gains from over time."

Further, Morgan Stanley is weary on Amazon's non-books media business, but believes Amazon will spend as much as necessary to gain top spot in the digital segment. The firm commented, "The books category has already been a huge success and given the media war that Amazon.com is now fighting to sustain its media business through the digital transition, we think Amazon.com will spend as much as it needs to in video to win top-spot within the second media category. With that said, we are incrementally negative on Netflix (Nasdaq: NFLX) as we believe Amazon.com has competitive strengths that could aid in its war for video market share, namely its video streaming delivery infrastructure and its large, engaged customer base...Net / net, Apple is a problem for Amazon.com and the first / second derivative impacts will drive Amazon.com to continue spending aggressively for an extended period in the areas of discounted hardware devices, acquiring content, etc to sustain its competitive position within the media category."

Amazon shares are down 4.7 percent early.

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