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.
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.