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Summary:

As analysts scratch their heads try to explain why Amazon’s stock defies gravity, they’re coming up with theories that are of interest even to non-investors. A Cowen & Co. analyst argues that Amazon “can eventually achieve a Wal-Mart-like share of the U.S. retail market.”

What goes up, they say, must come down. But there are exceptions, such as Amazon’s stock. Despite persistent complaints that it’s too expensive, the company consistently manages to defy them with surprisingly strong growth. And as Amazon pulls out of the worst recession in decades, it’s capable of reaching the level of scale that until now has only been seen by one retailer: Wal-Mart.

Indeed, Amazon already dominates e-commerce, and it’s on track to capturing a share of the entire retail market that would give it the kind of overweening influence Wal-Mart already holds over suppliers, consumers and by extension, its competitors. One can only hope it will be more benevolent.

First, a quick recap of Amazon’s history with investors is necessary. Bulls and bears have argued bitterly for the past decade about Amazon’s valuation. Bears say standard accounting metrics show it’s a screaming sell; bulls maintain its value isn’t best reflected in those conventional metrics. The bears appear to have the more rational case, but they have been wrong year after year. Amazon, it seems, just isn’t coming down to earth. Its price-to-earnings ratio has averaged 54 over the past five years, more than double that of the Dow. It currently stands at 71.

Amazon's five-year Price-Earnings ratio (Courtesy of BigCharts.com)

And analysts, in trying to explain why the stock consistently defies gravity, are coming up with some theories that are of interest even to non-investors. The latest comes from Jim Friedland, an analyst at Cowen & Co., who believes that Amazon “can eventually achieve a Wal-Mart-like share of the U.S. retail market.”

Amazon has a 0.3 percent share of the U.S. retail market, compared to Wal-Mart’s 7.7 percent share. But Amazon already has an 8 percent share of the U.S. media retail category, which includes books and music, and could control a similar chunk of categories like electronics, toys, sporting goods, groceries and health and beauty. As Friedland noted:

In 1984, when Wal-Mart was 22 years old, the company had a 0.3% share of the U.S. retail market, which is equivalent to Amazon’s U.S. retail share today at 15 years old. Over the next 25 years, Wal-Mart’s revenue increased at a 19% CAGR [compound annual growth rate]. We are projecting a 25-year revenue CAGR of 8% for Amazon. If Amazon’s long-term trajectory is similar to Wal-Mart’s historical growth, the shares are significantly undervalued.

It’s important to note that his bullish view isn’t shared by everyone. Certain investors are short Amazon shares — some 13 million of them — due to their belief that it will all come crashing down someday. But Amazon’s focus on a smooth customer experience, coupled with its longtime obsession with offering low costs, is a proposition that few can match. Barring any huge surprises, a Wal-Mart-like market share seems likely. That’s bad news for retailers, whether online or off, but something to which few consumers would object.

Wal-Mart’s expected 2009 revenue of $409 billion is equal to 2.8 percent of the U.S. gross domestic product, the first company to come close to the 3 percent mark since General Motors did a half century ago. Amazon’s 2009 revenue is less than one seventeenth of Wal-Mart’s. So it has quite a ways to catch up.

But the market, at least as far as Friedland is concerned, is saying Amazon can do just that — grow much closer to, if not quite as big as, Wal-Mart. Then again, one thing we’ve learned recently is that the market isn’t always right.

  1. I think the market is going to get used to buying more and more things online.

    With Amazon’s Prime service, this will get even better. Shipping charges are what dissuade me from buying online the most.

    In short, yes… I still think Amazon will be the new Wal-Mart.

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  2. I think that when (I hear it’s not “if” anymore) interstate taxes are imposed (and start to become enforced) we’ll see some of Amazon’s competitive advantage erode. Although I truly love the simple Amazon experience if a brick and mortar can come slightly close to price and with equal sales tax, I’ll probably buy at the local store especially if it’s a product that would be burdensome to return via the mail.

    Plus, is it just me or are people becoming more socially conscious with their purchasing? For example I’m hearing more and more people who try to find a local coffee shop over a starbucks to help the small local guy. Yeah, BestBuy isn’t small but it does employ people of the community. And if sales tax is equal – who knows…

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  3. Unfortunately, not everything ordered through Amazon or from Amazon has the quality one would require for THE on-line source of merchandise. This has caused me to look close to home for my needs. I include brick and mortar stores here.

    And competition among sellers on Amazon seems to result in the same total cost when the delivery is added to the selling price. WUWT?

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  4. BTW- Walmart is the current spelling.

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  5. [...] First, a quick recap of Amazon’s history with investors is necessary. Bulls and bears have argued bitterly for the past decade about Amazon’s valuation. Bears say standard accounting metrics show it’s a screaming sell; bulls maintain its value isn’t best reflected in those conventional metrics. The bears appear to have the more rational case, but they have been wrong year after year. Amazon, it seems, just isn’t coming down to earth. Its price-to-earnings ratio has averaged 54 over the past five years, more than double that of the Dow. It currently stands at 71. Read more in GIGAOM… [...]

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    1. Have I missed something? What’s the relevance here?

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  6. Just a note about benevolence from someone with a looong history in manufacturing including building for house brands:

    There has never been a company to match the level of greed and arrogance dealing with suppliers – of Sears, Roebuck and Company – in their heyday.

    The Ozymandias of American capitalism.

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    1. Lost a contract? Bitter?

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  7. I can see Amazon eventually becoming the online equivalent of what Wal-mart is to brick and mortar stores, creating an 800lb online gorilla that will squeeze out many smaller sites. My purchases have grown yearly on Amazon due to consistently low prices, cheap shipping, good customer service and a dizzying array of products to choose from that just keeps expanding.

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  8. The governement need to make Amazon collect state tax now! I don’t want to pay any more money on tax. But even worst is for an giant like Amazon to enjoy an unfair advantage over local retailers and other online merchnants.

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  9. [...] asks Will Amazon Be the New Wal-Mart? “Amazon has a 0.3 percent share of the U.S. retail market, compared to Wal-Mart’s 7.7 [...]

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