Since mid-December, retail stocks have declined as a result of weaker than expected sales. Target, Wal-Mart, BestBuy and many others failed to achieve investor hopes of a consumer adrenaline shot into an otherwise slow economic recovery.
Many retailers are blaming Amazon for cutthroat pricing, economies of scale and tax free advantageous the likes of which pushed Circuit City and Borders Booksellers out of business. Retailers claimed fowl when Amazon heavily promoted a mobile app that lets consumers scan goods inside retail stores and compare prices or instantly place order on Amazon.com.
Yet Amazon is viewed as a retailer and its share price has been punished along with other retailers in the segment. There are certainly other factors, such as the mixed reviews of the no-margin Kindle Fire, Amazon's heavy investment in media streaming, and the poor earnings per share in the most recent financial quarter. Investors don't see much upside in Amazon, have trouble classifying its business and with one of the highest Price-Earning ratios of a company its size it appears overbought.
Amazon, however, is set for an absolutely unbelievable fourth quarter.
- Amazon shouldn't be counted as part of the poor performing retail sector – the segment is suffering because Amazon is stealing market share!
- Kindle Fire, albeit with the blemishes of a first device iteration, is the number 2 tablet within 3 months. It is also the bedrock of a media ecosystem which drives a profitable $79 subscription and customer loyalty.
- Amazon web traffic is explosive. Looking at Alexa (an Amazon company) stats shows a dramatic increase in amazon.com holiday visitors relative to 2010.
Will investors react positively to record revenue even if profits are weak – probably not. Few investors have the appetite for longer term investment strategies like this even though Amazon, has gone through many of these investment cycles in the past. Amazon is also hard to classify in portfolios as it becomes more diversified with cloud computing, media distribution, content, and various other businesses . Perhaps the harvesting of profits won't come until late 2012, but Amazon's market dominance will likely be underappreciated for a while.
Disclosure: I'm Have a Long Position on Amazon