Since past few quarters, investors in Amazon (AMZN, Financial) have only witnessed earnings misses and ambiguity around the company’s new initiatives. The lack of profits has now caught up with the company and investors are no longer interested in Mr. Bezos’ innovative and dreamy plans. Perhaps, this is the reason that Amazon’s share price has declined from a 52-week high of around $408 to shy of $290. A depletion in topline growth has marred Amazon’s prospects as an ideal investment option. Yet certain analysts are confident of a bounce back and have described this decline as a lucrative buying point. In the face of these conflicting opinions, let us analyse if Amazon is a worthwhile investment.
Ecommerce: Amazon’s life support system
For long, Amazon has not reported any profits and in spite of being a $130 billion enterprise, the online retail giant does not have a strong bottom line to support such a valuation. The only thing that has maintained investor confidence for so long is the lion share of 23 percent in the online retail market. Even in the third quarter of 2014, Amazon’s ecommerce sales growth of 16 percent outperformed most other categories. For now, this dominance has been contributing well to Amazon’s topline, but with growing presence of traditional retailers in the e-commerce domain has worried analysts. In the last few years, Amazon has invested heavily in building out distribution centers nearby metropolitan areas in order to fulfil one-day deliveries.
However, for traditional retailers, this has been a cakewalk. Most of the established players like Walmart (WMT, Financial), Costco (COST, Financial), and Target (TGT, Financial) have reasonable number of stores in the city itself and that has made it possible for them to offer “store pickups” as well as “speedy deliveries.” As a matter of fact, an Accenture survey said that 78% of respondents they had "webroomed," (surfing online but buying in store) while just 72% had showroomed (surfing in stores but buying online). This implies that people are opting for store pickups as an efficient way of getting goods on time. For Amazon, this might not be the most exciting news because this escalates competition from the brick-and-mortar retail giants.
Online streaming: The new kid on Amazon’s block
The best thing about Amazon is that it never stops trying new things. Though quite a paradox, this zeal to venture into novel business spaces has damaged Amazon’s reputation as a valuable stock. However, the latest stab taken at online streaming, could become a profitable business unit for Amazon in the near term. The online megastore, a more recent entrant to the original streaming business, is becoming a more serious competitor to Netflix (NFLX, Financial), along with traditional TV networks. On Tuesday, Amazon announced the hiring of controversial filmmaker Woody Allen to write and direct his first comedy series. The announcement came two days after Amazon won a pair of Golden Globe Awards for critically praised comedy, Transparent, and a second highly praised comedy, Mozart in the Jungle.
Besides hiring Woody Allen, Amazon has also lined up a set of TV pilots for viewers to watch and vote on. This indicates that Amazon has strong intent to establish a wide presence in the online streaming business. As a matter of fact, it has managed to grab eye-balls from Hollywood owing to which talent agents are willing to bring projects to Amazon studios. Media analyst Michael Nathanson says competition, coupled with challenges facing the traditional TV business, has made producers and actors more willing to embrace new formats. Amazon’s biggest challenge in this space is Netflix, which has been investing heavily in building new content. Slated to release its fourth-quarter results on Tuesday, Jan. 20, Netflix said last quarter that its total streaming content cost obligations jumped to $8.9 billion from $7.7 billion in the previous second quarter, driven by launching in new markets in Europe and its expanding original programming with new shows and its first original movie.
Though Wall Street might not be exactly thrilled about Amazon’s foray into this space considering the earlier debacles, it has the potential to turn out a winner. Several analysts have upped Amazon’s rating in recent weeks because of its plan to build new content and draw customers for its Prime subscription.
“2014 was a historic year for Amazon on a number of initiatives,” said Citigroup analyst Mark May in a note this week, upgrading the stock to a buy. May cited Amazon’s hardware launches, the largest fulfillment center development by the ecommerce giant and “record content spending.” Amazon Studios has already announced five additional original series to debut in 2015.
Takeaway
Since the beginning of the year, the Street has wiped off a substantial 30 percent of Amazon’s market cap because of disappointing performance and uncertain future prospects. Undoubtedly, this has pulled down Amazon’s valuation and based on the EV/revenue multiple, the company fares better than its peers. However, the concern that still persists is that Amazon does not have the profits to support even the current valuation and as such, there is a high probability of a further correction in the stock price. In keeping with these points, I would advise investors to stay away from investing in Amazon.
