Amazon dealt US$250B blow to market cap
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-per-cent 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 CEO Jeff Bezos the world’s wealthiest man and Amazon the second U.S. company to reach US$1 trillion in market value, albeit briefly.
But the quarterly results published Thursday told a different story. Amazon 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 onequarter of their value since hitting a record high last month of US$2,039.51. Amazon’s market value has shed about US$250 billion since that US$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 per cent before the report — and Amazon gave them an excuse,” said Colin Sebastian at Robert W. Baird & Co.
It’s not only Amazon that’s facing a rough patch. The S&P 500 is hurtling toward its worst monthly performance since the bull market began.
Amazon last week forecast revenue of as much as US$72.5 billion in the current quarter, falling short of analysts’ average estimate of US$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 firm 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.
Fears of slowing growth could be misguided due to misunderstanding about how Amazon makes money, said Michael Pachter 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 US$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.”