Amazon.com, Inc. (NASDAQ:AMZN) appears poised to take over the world. From groceries, to streaming, to its original business of retail, Amazon seems to succeed at everything it does — and AMZN stock reflects this.
The stock prices of competitors fall at the mere hint of having Amazon as a competitor. Dozens of cities have offered billions in tax breaks to secure its second headquarters. However, amid its popularity, a pattern of history repeating itself has emerged.
And this pattern bodes poorly for AMZN stock.
Historical Patterns Should Concern Holders of AMZN Stock
Amazon is becoming the new Wal-Mart Stores Inc (NYSE:WMT).
In roughly a generation, Walmart emerged from obscurity in rural Arkansas to become the world’s largest retailer. Walmart’s bulk pricing, advances in supply chains and, eventually, the power to force supplier cost cuts made WMT a retail behemoth that everyone feared — much like Amazon today.
However, other companies caught up on pricing and surpassed Walmart on product quality. Furthermore, reports of poor working conditions cut into WMT’s popularity and, eventually, its stock price. Unfortunately for owners of AMZN stock, some of the same trends have emerged at Amazon.
Amazon has failed in many areas. Reports of poor working conditions have become more frequent. Stories of product failures have also emerged. As my colleague Dana Blankenhorn mentioned, the Amazon Fire smartphone did not burn its competitors. Amazon Register also failed to defeat tiny Square Inc (NASDAQ:SQ) in the credit card reader market. Moreover, the Amazon Prime streaming movie offerings never became a threat to Netflix, Inc. (NASDAQ:NFLX). While AMZN succeeds in many areas, it has failed on many occasions as well.
Yet, despite the failures, Amazon’s reputation for success and growth drive the AMZN stock price. AMZN trades at nearly 300 times current earnings. Revenue growth has averaged over 23% per year over the last five years. This is an impressive feat for a company with a market cap of close to $550 billion. Along with a 5-year average net income increase of 30%, high growth metrics have driven Amazon stock to over 22 times book value.
Amazon Isn’t Declining… Yet
The long-term worry involves the stock following in Walmart’s footsteps and experiencing a slowdown in growth. As a comparison, Walmart trades at 23 times earnings and less than 4 times book value. Its growth has slowed to an average of 1.7% in terms of revenue and income has actually been declining — to the tune of 2.8%. Matching Walmart’s PE ratio would bring the AMZN stock price to below $100 per share.
At least for now, the hunter has become the hunted. The fear Walmart once inspired has been brought forth on Walmart itself by Amazon. Competitors such as Target Corporation (NYSE:TGT), Costco Wholesale Corporation (NASDAQ:COST) and Kroger Co (NYSE:KR) have also seen stock declines by the mere presence of Amazon in markets they compete in.
Additionally, the company hasn’t followed in Walmart’s footsteps in all areas. Amazon founder Jeff Bezos remains alive and in charge. Walmart’s decline began long after founder Sam Walton passed away.
Walmart’s decline also occurred over several years. Amazon analysts still expect profits to double most years into the foreseeable future. However, double-digit growth remains difficult to maintain as a company grows larger. And if AMZN loses its reputation for taking over business niches, investors will stop paying 300 times earnings.
The successes and emerging problems with AMZN stock place the company in the same historical pattern as another successful retailer — Walmart. Amazon’s market takeovers and tremendous growth have inspired both fear and respect in other companies.
Stocks swoon at the threat of Amazon. Dozens of cities have also offered incentives to attract the company’s second headquarters.
However, high valuations, product failures and reports of poor working conditions should concern investors. All these could change the company’s reputation for the worse and drive AMZN stock price to much lower levels.
Investors wanting bigger returns should look for the next AMZN… and avoid the current one.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.