This week we learned that E-Commerce Retail Sales growth slowed in the first quarter of 2013 compared to Q4 of 2012. Obviously, this is important information for Amazon.com (AMZN) shareholders, but does it mean we should sell the stock? Shareholders will be glad to hear that it is not a reason to sell the stock in my view. However, short sellers will be interested in why I would sell AMZN anyway.
The government published Quarterly E-Commerce Retail Sales data for the first quarter of 2013 this past week. The report showed sales increased 2.7% over Q4 2012, which was slower than reported fourth quarter growth of 4.4%. Total Retail Sales only managed 1.1% first quarter growth, reflecting the continued market share grab for e-commerce sales. However, e-commerce accounted for just 5.5% of total sales in Q1 versus only a slightly lower 5.4% share in Q4.
But what caused the slowing pace of sales in Q1, and is it an issue of concern for Amazon.com , eBay (EBAY), Overstock.com (OSTK), E-Commerce China Dang Dang (DANG), priceline.com (PCLN) and every other seller of goods and services on the Internet? I think I have built the suspense up far enough for busy shoppers and investors to bear. The answer is no, it is not an issue, and the reason is quite simple: seasonality.
The same factors that apply to holiday period sales for brick and mortar retailers apply to the online sellers. A close look at the report and the chart I have attached hereunder shows that seasonality is readily apparent, and is actually growing even more exaggerated with time for e-commerce sales.
Looking at the year-over-year sales pace clarifies things for us. E-Commerce Sales were higher by 15.2% against the prior year quarter. Though, that was down from the Q4 comparison with its prior year comparable; Q4 sales were up 15.6% year-over-year. This quarter's sales pace was in fact the slowest pace since Q1 2012 grew 15.3% over Q1 2011. Still, that growth rate is just slightly better than this past quarter, and helps to comfort us about the health of the e-commerce channel.
The unadjusted figures show Q1 e-commerce sales down 18.9% versus Q4 2012; overall retail sales were down 8.5% on an unadjusted basis through the same period. So it was simple seasonality at play, and all is well in e-commerce.
Sell Amazon.com Anyway
Now that we have cleared up the concerning issue of a slower e-commerce growth rate, why would anyone want to sell the king of e-commerce, Amazon.com ? That's simple as well, valuation, especially given the economic environment I see developing.
Amazon.com has more than recovered the ground it lost late last year, but similar economic concerns are at play now in my view. The same pressures that applied to the stock should again build now under my estimation. Under such conditions, I do not believe the stock can sustain its current valuation. The stock's chart, with its many dips and blips, seems to show that it is being tested by the economic argument. If the argument becomes more compelling, I think it is clear the stock could fall easily to $250 again, which is a 7% move lower. If things get bad enough, I expect it could begin to look toward the ground it reached last fall. Obviously, this economic argument is not one shared by the majority, but a simple review of the economic data, which I've covered nearly completely over the past few months, might help those whose vision may be fogged by this year's stock market performance to see more clearly.
AMZN trades at a preposterous P/E ratio of 204X the analysts' consensus estimate for 2013. However, it trades at 83X the number for 2014. To better weed out the specific issues at play between these two years, let's consider the analysts' consensus five-year growth forecast for 37% average annual growth of EPS. That would give AMZN a PEG ratio of 2.2X, based on the 2014 earnings figure. I'm not arguing whether that is high or not for a company capable of this sort of growth. Rather, I'm arguing that it all depends on the operating environment. In this case, I see a deteriorating operating environment near-term, and believe the extremely high valuation will enable volatility, and therefore presents too much downside risk near-term for my comfort level. So, I would sell Amazon.com today, despite all the operating and strategic activities behind the numbers that I'm sure every long shareholder will now want to talk about hereunder.