I've commented on how Amazon.com's (NASDAQ:AMZN) ebook accounting change is influencing its reported revenues. I've also said that the previously strong correlation between ChannelAdvisor (NYSE:ECOM) data on "same-store sales" is being thrown off course because of the accounting change.
However, upon thinking about it some more I reached the conclusion that I have not yet provided a decent visualization of just how obvious this effect is. Talking about R2 on correlations or quantifying the possible accounting change impact hardly seems enough. There are much better ways to see the effect and this article will show them.
First, I will plot the ChannelAdvisor "same-store sales" growth rate alongside Amazon.com's overall revenue growth rate. The chart looks like this:
This already shows in no uncertain terms that the last 3 quarters were very different from the previous ones. Obviously, these last 3 quarters were the first to have the growing effect of the ebook accounting change.
Next, I will plot the ChannelAdvisor "same-store sales" growth rate divided by Amazon.com's overall revenue growth rate. The chart looks like this:
Again, the same phenomenon is obvious. There was a rather stable relationship between the two growth rates up until Q1 2013, which then broke down progressively as the accounting change spread to more and more of the ebook business. This brings us to Q4 2013, where the ChannelAdvisor "same-store sales" growth rate came in at 21.3%, which is actually less than the 22.5% AMZN revenue growth rate expected for the quarter, where previously the growth rates reported by ChannelAdvisor were consistently 150% or more of those reported by Amazon.com.
It should be noted that the existing correlation between ChannelAdvisor data and Amazon.com growth, which implies a 17.9% growth rate for Amazon.com in Q4 2013, already includes the effect of 2 quarters influenced by the accounting change. Without such effect, if we use a typical 1.50 relationship between the ChannelAdvisor growth rate and what's reported by Amazon.com, this would imply a revenue growth rate for Amazon.com as low as 14.2% instead of the consensus 22.5%.
Think about it
While Amazon.com is about to celebrate a 22.5% revenue growth rate, the real growth rate without the artificial ebook accounting change might actually be somewhere between 14.2% and 17.9%! The authorities might take long to react to such fudging of the numbers, but this is a massive difference for a stock trading for 535 times 2013's $0.73 consensus EPS.
The divergence between ChannelAdvisor data on Amazon.com "same-store sales" and the overall revenue growth reported by Amazon.com has become entirely obvious. This divergence happened and grew larger during the last 3 quarters, exactly the time frame where one would expect the ebook accounting change to have taken place. It is thus likely that this divergence happened because of the accounting change, which inflated Amazon.com's reported revenue growth rate while not influencing the ChannelAdvisor data.
An alternative explanation would be for ChannelAdvisor's clients to suddenly be losing Amazon.com share and for them to recently be underperforming significantly. This seems unlikely.
The past relationships between ChannelAdvisor data and Amazon.com revenue growth imply a 14.3%-17.9% growth rate for Amazon.com instead of the 22.5% that Amazon.com is expected to report for Q4 2013. This is massively material for the stock, so the SEC ought to clarify if this effect is, or isn't, present.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in ECOM, over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I have options positions which stand to gain from AMZN stock going down.