Despite all its earnings disappointments and its heady valuation, Amazon.com (AMZN) continues to get buy recommendations and ever loftier price targets from most Wall Street analysts. I've stated my case against Amazon elsewhere, but the basic thesis is the following: revenue growth is slowing and will continue to do so as Amazon's market penetration increases, and margins will never exceed 5% because of the ultra-competitive nature of retail. Accordingly, I've been puzzled to see so many analysts who are bullish on Amazon.
However, I think I have figured out why the analyst community keeps giving Amazon a free pass. The vast majority of analysts covering Amazon specialize in internet, e-commerce, technology, and media/video gaming stocks. Very few cover other mass market retailers. While many Amazon analysts also cover eBay (EBAY) (another major e-commerce player), customers use the two sites for different purposes, and the two companies have very different business models. Other "e-commerce" companies followed by Amazon analysts have even less in common with Amazon, e.g. Groupon (GRPN), OpenTable (OPEN), and Kayak (KYAK).
The result is that Amazon analysts have maintained overly rosy growth predictions for Amazon. Analysts who cover internet and tech companies are used to seeing high growth rates even among mega-cap companies. Since Amazon has shown fairly consistent strong revenue growth in the past, these analysts tend to assume that very high (>20%) revenue growth can and will continue for at least the next five years. As Chad Henage points out, the vast majority of Amazon's growth today is in the consumer electronics/general merchandise category. The media category finally seems to be approaching a plateau, with Q3 growth of only 14%. This is still healthy growth, but not sufficient to justify an especially high earnings multiple.
In the consumer electronics/general merchandise business, some of Amazon's top competitors are Wal-Mart (WMT), Target (TGT), Costco (COST), and Best Buy (BBY). Each of these companies has scale equal to or greater than Amazon. The first three offer a broad line of merchandise, like Amazon, while Best Buy focuses on consumer electronics; all four offer competitive prices. Amazon's revenue growth and profit potential depends heavily on the actions taken by these key competitors. In the past year, these retailers have begun to view Amazon as a serious competitive threat and taken action to try to address this. For example, Wal-Mart and Target have stopped selling Kindle devices in their stores, while continuing to carry competing tablets and e-readers. Best Buy and Target plan to match most Amazon prices during the holiday season in order to combat showrooming.
Yet hardly any Amazon analysts cover these major competitors. Of the 40 Amazon analysts listed by Yahoo! (YHOO) Finance, only six cover any of these major retailers! (The full data list is below.) Thus, while they are aware of these developments, Amazon analysts are not well positioned to understand the magnitude of the impact these changes will have on Amazon's business. Analysts often cover 30 or more stocks, and so they naturally do not have time for multiple visits to stores outside of their coverage universe in order to survey customers, talk to management, etc. Yet without this perspective, analysts are unlikely to predict any change to Amazon's growth rate.
When Amazon's growth rate moderates (and this will happen soon, given increasing competitive pressures and the size of Amazon's revenue base, already around $60 billion/year), everybody will say that this was inevitable. But right now, the "smart money" does not recognize this. In large part, this is because the vast majority of professional Amazon analysts are not retail experts. As technology and internet experts, they tend to put too much emphasis on the "tech" aspects of Amazon's business, such as the Kindle/Kindle Fire suite of products. On the flip side, they do not recognize that Amazon's most important competitors today (Wal-Mart, Target, Costco, and Best Buy) are much better positioned to compete than Barnes & Noble (BKS) or Borders in Amazon's earlier days.
This myopia has led to severe over-pricing of Amazon shares at nearly 2X revenue and more than 100X projected 2013 earnings. As Amazon begins to lag analysts' revenue forecasts, I expect the stock to pull back to well below $200. I therefore rate Amazon as a strong sell or short.
Amazon analysts also covering one or more Amazon competitors:
Scott Tilghman, Caris & Co: covers electronics retailers and office supply stores.
Rob Wilson, Tiburon Research Group: specializes in retail companies.
Dan Geiman, McAdams Wright Ragen: covers retail stocks.
Matt Nemer, Wells Fargo: covers retail stocks.
Mark Miller, William Blair & Co.: covers retail stocks.
R.J. Hottovy, Morningstar: covers retail and restaurant stocks.
Amazon analysts not covering any Amazon competitors:
Joseph Bonner, Argus: covers media and technology stocks (no comparables); Shawn Milne, Janney Capital Markets: covers e-commerce (no comparables); Ben Schachter, Macquarie: covers internet stocks (no comparables); Aaron Kessler, Raymond James: covers internet stocks (no comparables); Brian Pitz, Jeffries & Co.: covers internet stocks and video game makers (no comparables); Shyam Patil, Raymond James: covers technology stocks (no comparables); Anthony DiClemente, Barclays: covers media stocks (no comparables); Jordan Rohan, Stifel Nicolaus: covers internet and e-commerce stocks (no comparables); Michael Graham, Canaccord Genuity: covers internet stocks (no comparables); Doug Anmuth, JP Morgan: covers internet and e-commerce stocks (no comparables); Victor Anthony, Topeka Capital Markets: covers media and internet stocks (no comparables); Atul Bagga, Lazard Capital Markets: covers gaming and e-commerce stocks (no comparables); Chad Bartley, Pacific Crest: covers internet and technology stocks (no comparables); Heather Bellini, Goldman Sachs: covers technology stocks (no comparables); James Cordwell, Atlantic Equities: covers technology stocks (no comparables); Scott Devitt, Morgan Stanley: covers e-commerce stocks (no comparables); Colin Gillis, BGC Partners: covers technology stocks (no comparables); Mark Harding, JMP Securities: covers technology stocks (no comparables); Jason Helfstein, Oppenheimer: covers internet stocks (no comparables); Stephen Ju, Credit Suisse: covers internet, e-commerce, and video gaming stocks (no comparables); Sean Kim, RBC Capital Markets: covers e-commerce stocks (no comparables); Kevin Kopelman, Cowen & Company: covers internet and e-commerce stocks (no comparables); Daniel Kurnos, The Benchmark Company: covers e-commerce stocks (no comparables); James Lee, Credit Agricole: covers internet stocks (no comparables); So Young Lee, Suntrust Robinson Humphrey: covers internet stocks (no comparables); Herman Leung, Susquehanna: covers internet and e-commerce stocks (no comparables); Gene Munster, Piper Jaffray: covers technology and e-commerce stocks (no comparables); Brian Nowak, Nomura: internet and e-commerce stocks (no comparables); Kerry Rice, Needham & Co.: covers internet stocks (no comparables); Ross Sandler, Deutsche Bank: covers internet and e-commerce stocks (no comparables); Colin Sebastian, Robert W. Baird: covers internet and video gaming stocks (no comparables); Ken Sena, Evercore Partners: covers internet stocks (no comparables); Youssef Squali, Cantor Fitzgerald: covers internet and e-commerce stocks (no comparables); Edward Williams, BMO Capital Markets: covers media and video-gaming stocks (no comparables).
Disclosure: I am short AMZN.
Additional disclosure: I may initiate a long position in BBY over the next 72 hours.