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Amazon Shares Dip on Downgrade (Update 1)

(Updated from 10:38 a.m. ET to include latest share prices, more analyst commentary.)

NEW YORK ( TheStreet) -- Shares of (AMZN - Get Report) fell Monday after Bank of America Merrill Lynch downgraded the stock to neutral, saying a "protracted" investment cycle may weigh heavier on the online mega-retailer's bottom line than expected.

The firm also expects competition from Google (GOOG - Get Report), Apple (AAPL - Get Report) and others in digital media to keep Amazon's valuation multiple in check, and said it thinks the consensus estimates for the second quarter and fiscal 2013 may be too high.

"This is not an 'Amazon trades at an unjustifiable P/E call' (CSOI [consolidated segment operating income] margins should rebound to 6-7% from ~2% today in our view, but maybe later than most think), but with the stock up 18% YTD and for the reasons cited above, we are downgrading to Neutral," said B of A, which has a $235 price target on the stock.

The stock was down 2% to $198.47 in afternoon trades on volume of 4.6 million, approaching the issue's trailing three-month daily average of 6 million. Based on Friday's close at $202.51, the shares are up 10.7%, trading at a forward price-to-earnings multiple of 74.6X vs. 12.1X for Apple and 12.7X for Google. Since hitting a 52-week high of $246.71 on Oct. 17, Amazon shares had lost 18% through Friday.

B of A detailed its concerns about Amazon's level of investment, saying headcount is growing faster than revenue and that the company is still building out fulfillment centers in the United States to back its same-day shipping drive.

"Amazon hired 4,900 people in 4Q, and we expect heavy hiring to continue in 1Q to support additional fulfillment build-out and investment in digital initiatives including AWS [Amazon Web Services], Kindle ecosystem, and digital media," the firm wrote. "Our model assumes that Amazon will increase headcount by 3,900 people in 1Q, which represents 59% y/y growth, well ahead of 31%, 43%, and 25% y/y 1Q revenue, unit and active customer growth."

Then there's the competition, which is not sitting idle. Amazon is battling it out with heavy hitters on a number of fronts. The Kindle Fire tablet competes with Apple's red-hot iPad 3, and the company's digital content efforts are up against HBO GO, Netflix (NFLX), Google's new Google Play digital books, music and movies offering, and the various streaming services of cable companies like Comcast (CMCSK).
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