Amazon Benefits From Increasing Penetration of Online Retail Sales

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The penetration of online purchases in the overall electronics and general merchandise (EGM) sales in the US has been rising over the years, from about 6% in 2005 to around 12% in 2010, led primarily by increasing broadband penetration and advanced online security features. We believe the increasing shift to online retail spending will benefit players like Amazon ( AMZN ) that is seeing share in total online EGM sales.

Amazon competes with online retailers like eBay ( EBAY ) as well as traditional brick and mortar players like Wal-Mart ( WMT ), Best Buy ( BBY ) and Costco ( COST ) that are aggressively entering the online retail business.

While we expect online EGM retail penetration in the US will continue rising to around 26% over our forecast period, Trefis members predict a slightly lower level of around 24%, translating into a downside of 7% to our price estimate for AMZN stock.

We currently have a Trefis price estimate of $182 for Amazon's stock , slightly below below the current market price of $183.

Increasing Broadband Penetration and Better Online Security

The presence of multiple broadband providers like AT&T (T), DirecTV (DTV) and Comcast (CMCSA), all vying for a higher market share, has led to a competitive pricing environment. This has resulted in Internet becoming more affordable and accessible to consumers. Also the use of improved encryption technologies have made transactions over the Internet more secure, encouraging consumers to make more purchases online.

Expansion of Traditional Retailers into Online

With more number of consumers shifting to online shopping, traditional retailers like Wal-Mart, Best Buy and Costco are stepping up efforts to expand their online presence. This means more competition for online retailers like Amazon and Ebay. Since setting up of online business is cheaper than having a traditional brick and mortar set-up, many small and medium enterprises (SMEs) are going online.  We believe such steps would boost penetration of online in the overall sales of electronics and general merchandise.

Trefis Community Forecast

The Trefis community forecasts Online as a % of US EGM Retail Sales will increase from 13% in 2011 to 20.8% by the end of the Trefis forecast period, compared to the baseline Trefis estimate of an increase from 14% to 26% during the same period. The member estimates imply a downside of 7% to the Trefis price estimate for Amazon's stock.

Our complete analysis for Amazon's stock is here .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: AMZN , BBY , COST , EBAY , WMT

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