SEATTLE – Fears of a prolonged market downturn, slowing international sales, stepped-up competition in the U.S. and flat-out confusion about how Amazon.com Inc. makes money are all reasons behind the company’s dizzying 25 percent drop in value from its September high.
The world’s largest online retailer had been an investor darling, with shares more than doubling over the past two years on optimism that Amazon would continue to gobble up sales while increasing profitability. Enthusiasm about Amazon’s sustained growth made Chief Executive Officer Jeff Bezos the world’s wealthiest man and Amazon the second U.S. company to reach $1 trillion in market value, albeit briefly.
But the quarterly results published last week told a different story and Amazon has also issued a disappointing revenue and profit forecast for the busy holiday period.
The investor shock has only intensified since then and the shares have now lost one quarter of their value since hitting a record high last month of $2,039.51. Amazon’s market value has shed about $250 billion since that $1 trillion milestone.
Adding to Amazon’s woes are a proposed digital business tax in Europe and further talk of tariffs that could dent consumer spending. Those factors combined to persuade some investors that now is the time to cash out on their Amazon bounty.
‘Investors are looking to sell their year-to-date winners — Amazon was up 52 percent before the report — and Amazon gave them an excuse,’ said Colin Sebastian, an analyst at Robert W. Baird & Co.
It’s not only Amazon that’s facing a rough patch in the market. The S&P 500 is hurtling toward its worst monthly performance since the bull market began. Even companies that have reported stellar earnings haven’t managed to buoy sentiment. And many of Amazon’s fellow tech companies have also seen their values erode considerably in recent weeks. Facebook Inc. is down 35 percent since hitting a record high in July.
Amazon last week forecast revenue of as much as $72.5 billion in the current quarter, falling short of analysts’ average estimate of $73.8 billion. The outlook and third-quarter results, which showed slowing sales growth in all major revenue categories, including international and cloud computing, prompted investors to question whether the company is reaching a saturation point.
The reasons for worry continued this week. The U.K. proposed a first of its kind digital services tax, spreading fear that governments could increasingly turn to big tech platforms for revenue. An escalating trade war with China added to overall market woes. Investors suddenly have a lot more risk to consider when assessing company value, and Amazon’s results showed investments by competitors could be taking a toll, said Allen Gillespie, an analyst at FinTrust Capital Advisors.
“Markets are being asked to discount a lot here and people have not been discounting risk because of the central banks for a long time now,” he said. “Amazon is now seeing more competition from Walmart.”
Fears of slowing growth could be misguided due to misunderstanding about how Amazon makes money, said Michael Pachter, an analyst at Wedbush Securities Inc. Amazon is a retailer that sells goods directly to consumers and a marketplace acting as a middleman between online merchants and shoppers. Marketplace sales are more profitable for Amazon even though it records less revenue on those transactions.
When a shopper purchases a $400 television directly from Amazon, Amazon reports $400 in revenue. That same purchase from an independent merchant on Amazon’s marketplace would represent about $120 in revenue for Amazon, based on a rough estimate of its commission and fees for packing and delivery.
The mix of Amazon retail sales and marketplace sales is constantly in flux, making it difficult for analysts to predict, Pachter said. Amazon’s revenue can swing as much as $1.3 billion each quarter even if shoppers spend the same amount of money on the site, he said.
“The downdraft is due to a misperception that their growth is slowing,” he said. “The simple answer is that investors don’t get it.”