ChannelAdvisor’s monthly sales assessment about the world’s largest e-retailer Amazon (NASDAQ:AMZN) suggests that latter’s same store sales growth is slowing down. The trend is in contrast to the faith shown by the market in the company which has seen the stock price touch highs of $282. We have a near $240 fair value estimate for Amazon, which is around 10% below the current market price.
We believe the market is being overly optimistic about Amazon’s performance in 2013 and beyond, particularly with respect to growing competition. The company has cut prices of its high margin web services due to rising competition which is expected to negatively impact its already thin margins. Amazon had reported its first quarterly loss in almost a decade in October and current trends could see the same happening again. Below we take a look at the factors which will make it tough for Amazon to maintain its current stock price.
Sales Growth Slower Than Needed For Current Stock Price
If the relationship between ChannelAdvisor’s monthly sales and the direction of Amazon’s sales growth holds as it has in the past, Amazon’s sales growth rate for Q1 2013 will be below that reported for Q4 2012. Combined with an expected slowdown in the U.S. e-retail market in 2013 and beyond, Amazon will have to win over substantial market share from competitors to justify its high market valuation. This will be a tough task as Amazon already dominates the online retail market and its competitors are now willing to match its discounted prices.
Margins To Take A Hit As Web Services Prices Drop
Facing strong competition from Microsoft, HP and other cloud service providers, Amazon has been cutting the prices of its web services.  Recently, Amazon’s margins were helped by high margins on these services combined with strong revenue growth from the segment.
The company operates on thin margins by heavily discounting items it sells and offering services like shipping and video streaming for free. With the company now charging sales tax in eight states and six more states expected to join the list this year, the slim margins that the company enjoys will be under further pressure.
We have a $236 Trefis price estimate for Amazon which is 10% below the current market price.
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