Given the 86 million consumers that Jupiter Research predicts will be buying gifts online this holiday season, Amazon should be throwing off good cheer all around, right? Not exactly. Wall Street is acting like Scrooge as it frets about slowing revenue growth and diminishing profit margins in 2005. The big problem: Analysts are belatedly coming around to the idea that Amazon may be just a retailer, not some Internet high-flier that will dominate e-commerce. That means Amazon shares should be valued lower. Wharton experts, however, say these short-term worries are overblown although Amazon's business model does raise some concerns. Is being viewed as a retailer really so bad?
The bah-humbug crowd emerged shortly after the company announced its third quarter earnings in October. Amazon reported net income of $54 million on revenues of $1.46 billion, compared to net income of $16 million on revenues of $1.13 billion a year earlier. For the all-important fourth quarter, Amazon predicted revenue growth of at least 31% to $2.29 billion-$2.54 billion. For 2004, sales are expected to be up 32% to $6.67 billion-$6.9 billion.
While those results were strong, analysts panned the company's 2005 projections of sales between $7.4 billion and $8.15 billion, and operating income between $500 million and $625 million. The rub: Amazon's percentage increase of revenue growth falls "significantly to the mid-teens next year while the company increases its operating expenses to build up an even bigger infrastructure," wrote Piper Jaffray analyst Safa Rashtchy in a research report following Amazon's earnings report. "The result is that Amazon is making less money on each incremental dollar of sales."
On Nov. 18, Bank of America securities analyst Aram Rubinson did Rashtchy one better. He started coverage of Amazon with a "sell" rating and a price target of $26 at a time when Amazon shares were trading at $39.90. Calling Amazon a "mass market player in a niche market," Rubinson says Amazon is a mere retailer, and not an Internet stock that deserves a loftier valuation.
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