There is no other company in the world like Amazon.com (NASDAQ:AMZN). Started as a simple bookselling website, the online retailer has come to dominate not only e-commerce, but also cloud computing and e-books. It is a disruptive force in a host of other industries -- and it did it all before reaching legal drinking age.
Amazon stock is equally baffling. With a market cap of nearly $220 billion and essentially no earnings, the stock is an anomaly on Wall Street. Conventional methods of valuation, such as the earnings multiple, are useless. Instead, the market has bestowed an astronomical value on the company because of its growth rate, sales approaching $100 billion, its track record as a disrupter, and what's seen as its many competitive advantages.
Indeed, Amazon's growth has been like no other company during its history. As the chart below shows, sales jumped from less than $10 billion in sales 10 years ago to $92 billion over the last 12 months, while revenue growth has fluctuated between 15% and 50% a year, with the rate being partially suppressed by a strong dollar in recent quarters.
The engine of that growth has been e-commerce, the division of Amazon that sells electronics, general merchandise, and digital content such as e-books and streaming video, but Amazon isn't the only company benefiting from the growth e-commerce as domestic online sales have grown from $113 billion in 2006 to $297 billion last year, and could hit $350 billion this year, according to the Census Bureau.
The graph below shows the growth rates of Amazon's North American e-commerce division and overall domestic e-commerce.
As you can see from the graphic, Amazon for years maintained a large gap over overall e-commerce, but in recent years, that lead has eroded. Since its post-recession pop, the metric has fallen in every year since 2010, and is now at its lowest point in the last 10 years. The narrowing gap, which is now just 7 percentage points, could also be a sign that Amazon's competitive advantage in the space is eroding because if a company is only growing at the same pace as its industry, its growth owes to the industry it competes in rather than the company's own strength. Though the growth and surprising profit of its cloud computing unit delighted investors in its last quarterly report, North American e-commerce makes up the majority of its revenue, and will continue to do so for the foreseeable future, making it the most important component of Amazon's future success.
What it means
Amazon's slowing growth in the space is likely the result of efforts from traditional retailers to grab a piece of the growing e-commerce pie. As e-commerce's share of overall retail sales has shot from 2.8% of retail sales to 7% in the last 10 years, the big-box stores have taken notice, and Wal-Mart and Target in particular have stepped up efforts to boost web sales and are seeing growth rates in online sales similar to Amazon's. Wal-Mart said online sales grew 22% globally last year.
That may signal that Amazon's growth is more a factor of the growth of the industry that it dominates, but with online sales predicted to grow at 15% for the next few years, Amazon's growth should continue at least at that level.
While its growth rate could be coming back to earth, part of the company's success owes to its track record of successfully entering new industries in their infancy. It's done this not only with e-commerce but also e-books, streaming video, and cloud computing. Planting your flag in a nascent industry may be the best way to ensure that sales growth will continue.
For now, Amazon looks as strong as ever with its share price at an all-time high, coming off its Prime Day celebration and as investors anticipate another strong earnings report next week. But the moderating e-commerce growth could signal that the company's advantage in that area is fading. Keep your eye on that figure over the coming quarters as it may be the best indicator of Amazon's future success.