It's the prototypical Internet success story: Online retailer Amazon.com () has experienced rapid growth in both sales and the dizzying array of wares it offers in its relatively short life of 14 years. And in doing so, it has outstripped the sales growth of such brick-and-mortar rivals as Best Buy (BBY), Target (TGT), and even the 800-pound gorilla of U.S. retail, Wal-Mart (WMT).
Yet Amazon's stock, like those of other retailers, has dropped like a stone in the current market ugliness. From a 52-week high of 97.43 a share on Jan. 2, 2008, it has tumbled to a low of 34.68 on Nov. 20. By Nov. 25 it had regained a bit of ground, climbing to 42.19.
Part of the reason, of course, is that retailers aren't favored by Wall Street these days as the recession crimps consumer spending and merchants fail to pull in big crowds. But shopping online continues to be strong, judging from Amazon's third-quarter sales and earnings.
"Amazon.com continues to demonstrate the strength and worldwide potential of its business model," says Michael Souers, an analyst at Standard & Poor's, who rates the stock a buy. Part of its success comes from expanding its revenue sources, according to Souers. "[Continued] investments in long-term growth opportunities, such as Amazon Prime [shipping], seller platforms, and digital media stores" should provide added sources of revenues, says Souers. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
Margins May Expand
Such initiatives, he says, should result in continued strong sales and "significant margin expansion as it leverages its leading brand name and position as an Internet retailer."
Since 1995, when Amazon opened for business as the "Earth's Biggest Bookstore," the company has expanded its offerings to include a vast array of products such as apparel, shoes, jewelry, electronics, and computers. Later it broadened into movies, music, games, toys, and tools as well as sports, home-and-garden, grocery, and health products. It seems the list could go on if Amazon has its way.
About 55% of the company's sales come from North America and 45% from international. Media products accounted for 62% of 2007 sales; electronics and general merchandise, 35%; and other, 3%. Amazon has about $3.1 billion in cash, with only $1.3 billion in long-term debt.
Souers expects sales will rise by 30% in 2008, and continue to climb robustly the following year, driven by growth in new-product categories, expansion overseas, and a rise in third-party sellers. Based primarily on the jump in sales, he expects earnings to rise to $1.30 a share in 2008 and $1.63 in 2009, up from $1.21 in 2007. Souers sees the stock leaping to 62 in 12 months.
Gain in Market Share Ahead?
Indeed, Amazon has become a formidable online marketplace. Considering the tight economy, the e-tailer performed admirably in the third quarter ended in September, with sales rising 31%, although that marked the company's lowest year-over-year gain in 24 months. Even so, the performance still handily beat the average U.S. retailer's growth rate of only 1%. That suggests "a substantial gain in market share for Amazon," Warren Thorpe, an analyst at Value Line (VALU), said in a Nov. 21 report.
How does Amazon do it? First, this online retailing pioneer has attracted a loyal following. The number of active customers who make at least one purchase a year has climbed 17%, to 84 million. And the average customer spent 12% more than in the year-ago period, says Thorpe. He attributes the higher outlays to both a broader product catalog and the success of Amazon Prime's shipping service. Participation in the service rose 70% year-over-year, he adds.
Thorpe concedes that with consumer spending down so much, the retailer will likely have a difficult time maintaining its high performance levels. Nonetheless, he sees fourth-quarter revenues advancing 23%, to nearly $7 billion, from $5.6 billion a year ago. His sales estimate for 2009's fourth quarter is $8.3 billion.
Next year the operating environment will probably continue to be a challenge, says the analyst. Still, he predicts top-line growth in revenues of 17%, to $22.6 billion, in 2009, up from $19.4 billion in 2008 and $14.8 billion in 2007.
How does he expect Amazon to hit such targets? Aggressive pricing and heavy marketing should continue to attract shoppers, says Thorpe. The company should further benefit from a "very efficient infrastructure," thanks to heavy investments in info tech in the past couple of years.
Having fallen hard, the stock is a buy based not only on how Amazon has fared this year in such a difficult retailing environment, but more importantly as a play on the economy's potential for recovery. Think of what the company's top line and bottom line will look like—and how powerful its stock will be—once the economy turns up.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.