TSC Ratings' Updates: Amazon.com

The following ratings changes were generated on Monday, Oct. 27.

We've downgraded Amazon.com(AMZN Quote) from buy to hold. Strengths include the company's strong revenue growth across business segments in recent quarters, annual increases in net income, expanding margins and a healthy liquidity position. Downside risks include a decrease in demand for the products and services offered by the company or its third-party sellers, and a failure to drive revenue from new products and services.

Amazon's second-quarter revenue increased 34.9% to $2.89 billion, driven by a strong performance from both the North American and international regions. North American revenue jumped 38.4% to $1.60 billion, fueled by higher demand for products within the electronics and other general merchandise business segment. International revenue surged 30.9% to $1.29 billion, supported by strong revenue growth within the media segment. Gross profit margin for the quarter improved 55 basis points to 26.40%, from 25.85% in the year-ago period, while operating profit margin expanded 82 basis points to 4.05%, from 3.23%. Consequently, net income more than tripled to $78 million, or 19 cents per share, from $22 million, or 5 cents per share. Cash and cash equivalents for the quarter ended June 2007 were $1.67 billion, an increase of 17.3% over $1.42 billion a year ago. Meanwhile, the interest coverage ratio improved to 6.16 from 4.06, despite an increase in the interest expense. During the quarter, Amazon launched a number of new products and services.

Amazon's revenue depends on demand for company products and services or on demand for third-party sellers. A softening of demand, due to changes in consumer preferences or a weakening in the U.S. or global economies may result in decreased revenue and a failure to successfully launch new products and services.

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