Amazon, basking in the glory of its first quarter performance, was downgraded by Pacific Crest, a Wall Street firm, as increasing competition is expected to slow things down for the retail giant. This is the second big downgrade after another Wall Street firm, Raymond James, downgraded Amazon from overweight to underweight before the earnings release, citing lack of profitability.
Amazon has been a darling for Wall Street firms, and downgrades are usually few and far between. The stock price has zoomed by more than 40% in the last twelve months as Amazon continued its furious growth pace, recording solid double digit growth for the each of the last four quarters.
Competition has indeed intensified, and Walmart certainly looks like it has finally got its act together on the e-commerce front. But lack of profitability and slow growth doesn’t seem to rhyme well with Amazon.
For starters, Amazon has never been a company to keep its eye on operating margins. There are enough articles and interviews with Jeff Bezos on the internet that will tell you how Amazon has always focused on scale and cash flow instead of chasing margins and bottom line profits.
With Amazon steadily expanding in internationals markets, the company has every reason to keep pouring money into those countries, and will do its best to keep the margins as low as possible as it hunts volume. Doing the opposite does not make any sense, as it will result in lower gross merchandise volume that, in turn, will actually reduce margins.
On the increasing competition angle, it’s way too early to call that one on Amazon. The competition has always been there. It is only now that brick and mortar stores are realizing that staying still is not an option, even as they work hard to increase their online sales.
But the real knock-out paradox here is this: once everybody takes the online route, it will actually expand the potential user base for Amazon.
“US online retail sales will reach more than $500 billion by 2020, up from $373 billion in 2016, according to Forrester’s latest eCommerce forecast.”
And with Amazon already having built fulfillment centers around the country, their margins and shipping turnaround times will actually be better than those of their competitors.
Let’s also not forget the fact that they have already learned the art of e-commerce, with decades of experience under their belt and possibly the world’s best e-commerce technology platform in their hands.
With the market itself growing at a fast clip, the market leader will keep tracking that industry growth rate, not go the other way. The double-digit growth rate may come down as Amazon’s billions from retail get bigger and bigger, but isn’t that the reason why they are operational in more than ten countries around the world, not to be dependent on one single country for their entire revenue?