Publications
Partners
Earlier on Tuesday, Smith Barney analyst Lanny Baker downgraded Amazon to sell from hold, saying that while overall online commerce growth is strong, the competition among online retailers is rising.
In his research note, Baker, citing data from comScore Media Metrix, said Amazon's average weekly visitor totals for the last week of November and the first three weeks of December were 14% higher in 2004 than 2003.
Average traffic at Target Corp's website rose 57% for the same period, while traffic at Best Buy's site increased 29%. Average traffic at Overstock.com increased 77%, and at Staples' site it rose 49%. Media Metrix measures internet traffic.
"Admittedly, Amazon's base user numbers are larger making the percentage change smaller for Amazon," Baker said in his note. "Yet, the data still shows a very consistent trend of faster user growth on the sites of traditional retailers."
The increased competition means Amazon will have to raise its marketing and technology investments "significantly" in 2005 to stay atop the online retailing world, Baker said.
During a July conference call, Amazon's executives said technology costs would rise during the third quarter and over time.
While the marketing and technology investments will help Amazon in the long term, the higher spending will "crimp" its profit margin in the short term, Baker said.
More money spent online
Also, its near-term profit forecast may not be robust enough to support a stock price that has risen 27% in the past two months, he said.
Brick-and-mortar retailers have become more aggressive and successful in their online endeavors in the last two years than they were initially, American Technology Research analyst Mark Mahaney said.
Those retailers' actions were guided in the late 1990s by the stock market, but now they are more concerned with statistics that show more people are shopping online and more money is being spent online, he said.
"If you're a major retailer, you have to have a presence online," said Mahaney, who has a hold rating on Amazon. "That's pretty much conventional wisdom now."
The difference in the level of competition from traditional retailers today compared with a few years ago is that those retailers have gotten better at selling products on the internet, Janco Partners analyst Martin Pyykkonen said.
Target, Best Buy and Home Depot have been cited as retailers that have, for example, improved their websites and marketing strategy, he said.
"They're doing a better job of figuring out what sells on the web, not trying to replicate their entire stores and getting items that will sell well on the web upfront," Morningstar analyst Joseph Beaulieu said.
Amazon is also facing more competition from other online retailers, Janco's Pyykkonen said.
Overstock, for example, has caught consumers' attention. Jewelry is a relatively new category for Amazon, but the company will have to continue expanding it because of competition from retailers such as online jeweler Blue Nile, he said.
More time for holiday shopping
In the short term, an increase in Amazon's marketing and technology spending to counter the competition could hurt profit margins by about 100 basis points, depending on the timing of the spending, said Caris & Co analyst David Garrity, who has a buy rating on the stock.
The best way for Amazon to counter the competition from traditional retailers is to continue executing its strategy.
The company has been increasing product selection, and it fine tunes its website regularly, American Technology's Mahaney said.
The company continues improving its logistics, as evidenced by Amazon giving consumers more time this holiday season to shop while still guaranteeing delivery by Christmas, he said.
Amazon has been selling products online longer than many other retailers and the company's execution of those sales is top-notch, Caris analyst Garrity said.
"As such, Amazon should be considered a well-positioned company," he said.
Still, Amazon has challenges. The company has so many product categories, for example, that it could be difficult to expand the number of categories, Pyykkonen said.
Amazon also has an efficient distribution system, and the challenge is how the company improves that already high level of efficiency, he said.
None of the analysts own shares of Amazon and their respective firms don't do investment banking work for the company.
