Amazon's Impact

Summary

• A full one-fifth of the S&P 500 constituents referenced Amazon on a quarterly earnings calls or Investor Day in the last 90 days.
• The scope and scale of the companies and industries referencing Amazon show the tremendous competitive reach of the e-commerce giant.
• Amazon's unique business model and its focus on growth over earnings pit it as a challenge to a host of profitable industries.

As second-quarter earnings wind down, I thought it would be an interesting study to examine how frequently Amazon (NASDAQ:AMZN) was brought up on quarterly earnings calls. In 2017, we have certainly seen the impact of Amazon on the share prices of retailers (XRT), retail and industrial REITs, and the grocery industry, among others. Given the negative impacts on some of these sectors, understanding where analysts and management teams are concerned about Amazon could help Seeking Alpha readers find stocks to avoid or short. Conversely, some companies view Amazon, especially its cloud business, as a complement to their own business, and this examination could also potentially uncover opportunities.

Fortunately, I did not have to go through hundreds of earnings transcripts with a highlighter to categorize the "Amazon" mentions. I used the beta Text Analyzer function on my Bloomberg terminal and searched the last ninety days earnings transcripts of S&P 500 (SPY) constituents. The results were pretty interesting.

A full one-hundred companies mentioned Amazon on their earnings calls or during a recent investor day. The interesting part of this study for me was the sheer diversity of the industries that referenced the e-commerce giant.

In the following sections, I wanted to highlight the main pockets of concern for investors in the one-fifth of the index referencing Amazon on their earnings call. Some of the sectors are certainly obvious, but others less so. In detailing these relationships, hopefully we are able to glean some important observations about a changing economic landscape.

Real Estate

Sixteen different REITs mentioned Amazon on their earnings call. The retail REITs are certainly concerned about e-commerce's disruption of brick-and-mortar retail. The purchase of Whole Foods (WFM) by Amazon puts a little pressure on grocery-anchored retail centers that were expected to be less exposed to the changing face of retail. The multi-family REITs were largely concerned with the impact of Amazon's growth on employment in various locales. I was surprised that Ventas (VTR), a healthcare REIT, was on this list. An analyst asked whether Amazon's newly formed healthcare division might have an impact on that sector.

Retail

In addition to retail REITs, retailers, apparel companies, and consumer products companies all referenced Amazon on their call. The diversity of the impact on specialty retail was fascinating: Staples (SPLS), O'Reilly Automotive (ORLY), Tractor Supply (TSCO), and Ulta Beauty (ULTA) all referenced Amazon.

Apparel companies like Michael Kors (KORS), Nike (NKE), Ralph Lauren (RL) and V.F. Corporation (VFC) were concerned with how to position their brands and the shift to omni-channel retail.

Analysts on the calls of household products companies referenced the growing number of consumers ordering products by voice from AmazonBasics. Inevitably, there was also a focus on Amazon's potential impact on margins. Packaged food companies are concerned about how their brands will be positioned in the changing retailer landscape. In addition to Amazon's explosive growth, the expansion of Aldi/Lidl, and the Blue Apron (APRN) IPO were also referenced.

There was also a discussion about Amazon being in the process of developing a pharmacy offering. The leading drug stores - CVS Health (CVS) and Walgreens Boots (WBA) - as well as two of the leading managed care companies - Cigna (CI) and Humana (HUM) - both referenced this fledgling initiative.

Entertainment Content

In a completely different arena, Amazon's development of original content will rival Netflix (NFLX). Disney (DIS) has responded by announcing that it will launch its own streaming service. As more and more content is being produced by non-traditional entertainment companies, there will be winners and losers in how consumers choose to access content.

Information Technology

Amazon's role as a dominant e-commerce platform and its tremendous cloud business obviously have a wide-ranging impact on the Information Technology space. Software companies, IT service companies and semiconductor companies all referenced Amazon directly on their earnings calls. For some companies, Amazon was viewed as both a complement and competitor in various parts of the business.

Surprises

Philip Morris International (PM) referenced the sale of its IQOS device on Amazon in Japan. Archer Daniels Midland (ADM), the agricultural products giant, referenced adding Amazon Flavors in Brazil as it looks to increase its geographic reach. Halliburton (HAL), the oil field services giant, did not discuss Amazon as a competitor, but described the "development of U.S. unconventional resources has been as disruptive to the global energy markets as Amazon has been to big-box retailing."

Summary

I am not a believer in paying the stratospheric equity multiples currently commanded by Amazon. As I have shown in my "5 Ways" series, factor tilts away from the biggest capitalization companies can generate long-run outperformance. In The Dominance of Megacaps, I showed that the largest 100 companies have meaningfully trailed the broader S&P 500 historically. Despite not wanting to own the stock directly, investors should understand the tremendous impact Amazon is having on U.S. commerce. The breadth of industries represented in this article is truly astounding. We have never before seen a company eschew profitability for market-leading positions in such wide-ranging industries. The disinflationary impact of Amazon through the lower costs of goods to consumers is probably not properly captured in inflation statistics and underappreciated in the bond market. Our examination of historic equity multiples over time could be adjusted for the uniqueness of a company with an outsized capitalization weight, but not in profit-maximizing mode. No other company comes close to the breadth of competitor mentions on earnings calls as Amazon. It is truly unique, and I hope this article helped frame the wide-ranging impact of the company for Seeking Alpha readers.

Disclaimer: My articles may contain statements and projections that are forward-looking in nature, and therefore, inherently subject to numerous risks, uncertainties and assumptions. While my articles focus on generating long-term risk-adjusted returns, investment decisions necessarily involve the risk of loss of principal. Individual investor circumstances vary significantly, and information gleaned from my articles should be applied to your own unique investment situation, objectives, risk tolerance and investment horizon.

Disclosure: I am/we are long SPY. 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.