Internet retailer Amazon (
) will release its Q3 2013 earnings on October 24. Evidence
suggests that while the company's growth will exceed that of the
overall e-commerce market, it is likely to come down as compared to
the third quarter of 2012. The primary reason behind this is
Amazon's growing size and the recent slowdown in the U.S.
In Q2 2013, Amazon's revenues jumped 22% globally, with the
electronics & general merchandise segment leading the way.
Despite this, the company reported a net operating loss and missed
consensus estimates, which reflects the pressure on its margins
resulting from the rapid expansion. This trend is likely to
continue in the third quarter as Amazon remains committed to
driving its sales volumes. This strategy could be risky if market
dynamics were to change and brick and mortar retailers launch a
full fledged assault on Amazon's turf. The established retailers
such as Wal-Mart (
) already have a strong supply chain and are certainly capable of
matching Amazon in prices.
Our price estimate for Amazon stands at $280
, implying a discount of about 15% to the market price.
Amazon expects net sales of between $15.45 billion and $17.15
billion in the third quarter, implying a growth of somewhere
between 12% and 24% over Q3 2012. The operating loss is likely to
increase, but the majority of it will result from higher stock
See our complete analysis for Amazon
We Expect A Slowdown In Q3 Growth, Long Term Growth
Outlook Looks Good
In its Q3 2013 earnings announcement, eBay raised concerns about
the slowing e-commerce growth in the U.S. Even a
suggests a slowdown in the growth in the month of August. We
believe that some of this can be attributed to the recent standoff
within the government and debt ceiling concerns. The macroeconomic
situation in the country is still not very sound and Amazon
could feel the impact in the near term. However, given that
Amazon operates in an industry which is witnessing explosive
growth across the globe, the risk from short term fluctuations
is small. According to eMarketer's September report, overall
e-commerce retail sales in the U.S. are expected to reach $260
billion in 2013, representing close to 16% growth over the last
year. This is still a fraction of the country's total retail sales,
which indicates large room for growth. The same market research
firm forecasts U.S. online retail sales to grow at a CAGR of
14% over the next few years, surpassing $434 billion by 2017.
Comparing ChannelAdvisor's same store sales (
) metric for eBay and its actual results for the third quarter, we
conclude that the overall growth stood meaningfully below the SSS.
If the same were to happen for Amazon, its growth could certainly
dip below what it was in the second quarter of 2013, and not just
below the figure for Q3 2012. The SSS metric tracked by
ChannelAdvisor shows a clear sequential decline for Amazon.
Margins Will Continue To Remain Thin
Although Amazon's diversified product portfolio and growing
e-commerce business will support its strong revenue growth, there
are factors that suggest there could be margin pressure going
forward. The company, which is in the middle of setting up a number
of fulfillment centers to roll out same day delivery, is battling
growing competition in the cloud/web services front, and is
spending heavily towards the development of its content
All of these activities are cost-intensive and will negatively
impact its already thin margins. In addition to this, big retailers
such as Wal-Mart are ramping up their online efforts, which will
negatively impact Amazon's profitability due to higher competition.
The company is also expanding internationally and trying its hands
at groceries, which tends to be a lower margin business. Amazon is
clearly not bothered about doing anything regarding its percentage
margins as evident from the
, as long as lower margins imply higher cash flows.
The retailer's EBITDA margins declined from close to 9.5% in
2008 to around 6.6% in 2011, followed by a slight rebound in 2012.
If this decline continues and the figure shrinks to around 4% by
the end of our forecast period rather than 7.5% as we currently
project, there could be around 30% downside to our price estimate.
We believe this risk is justified given the recent margin declines
we have seen in recent years.
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