Will BRIC Markets Boost Amazon in 2013?
Leo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With a forward P/E of 152, it’s no question that Amazon.com (NASDAQ: AMZN) is the most expensive mature tech stock in the market today. While Amazon’s shares have never been fundamentally cheap, they have constantly defied technical gravity as a true testament to how many investors believe in the vision of its CEO Jeff Bezos. Even after reporting its first quarterly loss in four years in October, shares bounced back strongly on strong holiday sales of its Kindle Fire tablets and digital downloads.
Amazon has become such a disruptive force in the retail market that big box retailers such as Target and Best Buy have stopped offering Amazon’s best-selling tablet, out of fear that consumers are using their stores as showrooms for later purchases on Amazon.com. Amazon not only dominates retail, but it has spread into cloud-based storage and streaming services, threatening Netflix (NASDAQ: NFLX), Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Microsoft.
Now, a recent upgrade by Morgan Stanley analysts has cast light on Amazon’s final frontier - an aggressive expansion into Brazil and China - two of the BRIC markets that are now favored by investors again after the debilitating financial crises of 2008-2010. Can Amazon succeed where many other U.S. retailers have failed?
In Brazil, Amazon’s website does not sell any physical items, even its Kindle tablets. It only sells e-books and digital downloads. The company only recently released the Kindle Fire in Brazil, but it is only sold through two electronic retailers - Pontofrio.com.br and Livrarira da Vila. The tablets must then be activated by valid Amazon accounts. This business model is noteworthy, since it tells us that Amazon is confident that it can expand into emerging markets by only using digital retail.
Scott Devitt from Morgan Stanley, who upgraded the stock from equal-weight to overweight, claims that Amazon will fare well in BRIC markets due to a low saturation of credit card transactions. As these countries abandon cash and start using plastic more, e-commerce will flourish since Internet penetration rates in these countries is still rising.
Brazil’s online retail sales have grown 20% to 22.5 billion reais between 2011 and 2012. In the first half of 2012, the industry grew by 21% over the prior year, and is expected to post even stronger results for the second half once the final numbers are in.
Devitt urged caution regarding Amazon’s investment in Brazil, stating, “Market opportunities such as Brazil are complex and not without risk.” The blistering strength of the Brazilian real in comparison to other currencies will also impact profits from the region. Another unusual obstacle is the fact that Brazilian customers are used to paying for online items - even cheaper ones - in installments, rather than in a single lump sum payment.
Amazon is also in talks with Brazil’s largest bookstore chain, Saraiva, to acquire its online business. San Paulo-based Saravia is surprisingly abandoning its e-commerce arm to focus on its chain of over 100 brick and mortar stores, as well as its higher-margin publishing business.
Amazon started to expand into China with its $75 million acquisition of Chinese e-commerce site Joyo.com in 2004. Since then, it has captured a 7% share of the country’s online business-to-consumer market. 360buy Jingdong Mall, which ships products worldwide, is the market leader, controlling over half the market.
Meanwhile, the online auction market is dominated by Taoboao Mall, which is nicknamed the “eBay of China”. Taobao - which controls 80% of the auction market - is a subsidiary of Alibaba Group, the Chinese Internet giant which acrimoniously broke ties with Yahoo last year.
Amazon is expected to release the Kindle Fire in China soon, since Kindle apps started appearing on Amazon China’s website earlier this month. If the Kindle Fire’s success in America is any indication, then a successful launch could increase sales volume of digital goods substantially in 2013.
On the other hand, China is a veritable playground of cheap domestic Android tablets, where the Kindle Fire will struggle to stand out against its competitors, which often offer more features at a lower price. The closed ecosystem of the Kindle Fire - which completely locks out the Google Play marketplace - could also turn off Chinese users who are accustomed to the flexibility of Android.
Investors should remember that the Kindle Fire sold well in America due to its low price tag. If the Kindle Fire cannot be sold at a competitive price versus other full-featured tablets, does it stand a chance to use its flagship tablet as a vehicle to generate online revenue?
Back at home, the new Kindle Fire (8.9 an 7-inch versions) gained some serious ground against the industry-leading Apple iPad. Let’s take a look at tablet sales over the holiday season of 2012.
|Rank||Tablet||Market Share (End of 2012)||Change from Prior Year|
|2||Amazon Kindle Fire||7.51%||+3.03%|
|3||Samsung Galaxy Tab||4.39%||+1.38%|
The Kindle Fire was also the best-selling tablet on Black Friday. Apple fared the worst, as the iPad Mini and “new” iPad failed to impress shoppers. The Kindle Fire’s main appeal remains its low price - $299 for its 8.9-inch HD version and $199 for its 7-inch HD version - which forces the company to take a loss for each tablet sold. Amazon then makes up the lost revenue with digital sales of e-books, apps and videos on the devices, which must be synchronized to an active Amazon.com website with a valid credit card.
Each Kindle Fire also comes with a free one-month trial subscription to its premium service, Amazon Prime. Amazon Prime has proved immensely popular, offering unlimited streaming videos, free monthly e-book checkouts and free two-day shipping, for $79 per year. This has become a direct threat to Netflix, which offers streaming videos for $8 per month, or $96 annually.
Last quarter, Amazon reported a net loss of $274 million on revenue of $3.18 million, missing analyst estimates on both the top and bottom lines. Amazon attributed $169 million in losses to its investment in Groupon competitor Living Social. Although investors fled at first, they have since returned to the stock, which is currently flirting with 52-week highs.
Investors will be watching Amazon’s quarterly earnings announcement on January 31 for more clues regarding its performance in BRIC markets - especially its progress in Brazil and China.
In my opinion, Amazon is an excellent growth stock, but four things keep me from buying right away:
- A high P/E ratio, which makes it highly vulnerable to market downturns.
- An unimpressive return on equity ratio of 8.6.
- An increasing dependence on BRIC markets, which exposes it to volatile macro movements.
- It's trading near all-time highs.
I think patient investors will be rewarded if they buy the dips in Amazon, rather than chase the rips. I would look for better entry opportunities near its 50-day moving average of $252, or above its 200-day moving average of $241.
Leo Sun owns shares of Apple. The Motley Fool recommends Amazon.com, Apple, Google, and Netflix. The Motley Fool owns shares of Amazon.com, Apple, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!