Morgan Stanley upgraded Amazon.com (AMZN) on Monday and upped its price target to a nose bleeding level of $325 per share. The main thesis of the upgrade by the Morgan Stanley analysts centered on contending that Amazon's global order fulfillment network is an "underappreciated, strategic asset" that could help the company gain market share. They believe this asset will drive revenue in 2015 to $166 billion from an estimated $61.5 billion in 2012. There are three ways to look at this astonishing forecast.
First, Amazon would need to add over $104 billion in new revenue in just three years. That would require them adding an average of $35 billion of new revenue per year, or over 56% of what the company sells annually today (Figure 1). That means they need to recreate a new Amazon infrastructure every 21 months. This would require an unrealistic amount of investment, and I have shown in a prior article that the current level of stepped up investment is having difficulty cost scaling to cover the current growth path they are currently on in CY11 through CY13 (adding $13-$14 billion per year in new revenue only).
Second, to achieve $166 billion in 2015 would necessitate a nearly 40% revenue compounded annual growth rate for the next three years. Amazon's growth has slowed precipitously over the past eight quarters (Figure 2), and the trend is consistent in its path downward. Of the three main businesses, only Amazon Web Services (AWS) is currently higher than 40% growth (Figure 3), and it is less than 4% of the company's revenue. Add to this requirement that US e-commerce has averaged only about 11% growth over the past several years, and total global e-commerce is expected to grow about 15% per year in 2012 and 2013. This means Amazon would need to about triple the global growth rate over the next three years, or beat it by 2,500 basis points. In 2012, Amazon is estimated to beat the global e-commerce rate by a little over 600 basis points, only about 25% of what they will need to do going forward to meet Morgan Stanley's forecast.
Third, if Amazon's international fulfillment assets are so undervalued, why are they underperforming their North American counterparts so significantly (Figure 4), when the international e-commerce market has been growing faster? Amazon's international growth in 2012 has stalled to market growth. Morgan Stanley expects Amazon to more than double their current growth rate internationally for the next three years, just as their growth has slowed in those markets and local competition is increasing, particularly in China, the fastest growing e-commerce international market.
On top of these major trends and headwinds that Amazon would have to overcome, I would be remiss not to mention that Amazon currently loses money with their International business. Making it up with volume would not seem to help the bottom line or free cash flow. Amazon's performance to date has not convinced me that even they can grow at these forecasted levels going forward, and certainly not profitably. So how do you value that as upside? Ridiculously.
Disclosure: I am short AMZN.