Shares of Amazon.com (AMZN) are down $8.11, or almost 3%, at $266.99, after J.P. Morgan’s Doug Anmuth cut his rating on the shares of Neutral from Overweight, after trimming his estimates, arguing that the company’s gross profit is facing “material deceleration” this year, as third-party sales “moderate” and the company faces tougher comparisons.
Amazon’s “gross merchandise sales” make up 26% of U.S. e-commerce, by his measure, which is set to decline to 24% next year and 21% in 2015, and that, along with a decline in gross profit growth will start to hit the investment case for the stock:
We believe gross profit growth of +40% Y/Y was a major driver of Amazon’s stock in 2012. In addition to GMS and unit growth, we think gross profit growth provides a good proxy for Amazon�s top-line growth as it normalizes for the mix- shift 3P sales. We believe investors continue to view Amazon as a top-line growth story, with potential for margin expansion over the long term [�] We estimate 2013 revenue growth of 24%, a modest deceleration from 27% Y/Y growth in 2012. However, we expect gross profit to decelerate more significantly to 31% Y/Y in 2013 from 40% growth in 2012. As discussed in more detail later in the report, we believe the key drivers of gross profit deceleration are: 1) moderating growth in third party sales from 51% in 2012 to 37% in 2013; 2) 1P gross profit margin potentially contracting due to international expansion and rebounding eReader/Tablet sales; and 3) tougher comps.
Anmuth explains his methodology for his “bottom-up analysis” of Amazon’s outlook by segment, including its “first party” sales and “third party” sales:
For our gross profit analysis, we assume 3P sales (both seller commissions and FBA excluding Shipping) as well as AWS have 100% margin, while Advertising/Other also has a relatively high gross margin of ~90%. We estimate Amazon invested ~$670M on Prime Instant Video and Kindle Lending Library content in 2012. Our 1P gross profit estimate is derived by subtracting gross profit for each segment�3P, Other, Content, and Shipping�from total gross profit. As a reminder, we think gross profit is a good proxy for Amazon�s top-line performance (rather than profitability) as costs related to FBA and AWS are primarily included in operating expenses.
Anmuth cut his estimates for this year to $75.5 billion in revenue, 23.6% in gross profit margin, and $1.63 per share in profit, down from $76.5 billion, 25.2%, and $1.70. That compares to the Street consensus for $75.72 billion, 25.8%, and $1.47 per share.