Amazon.com's share price hit a new record in early September of USD 2,040, taking the company to a market capitalisation of over USD 1 trillion. After Amazon's latest quarterly results, the share price fell to as low as USD 1,603, due to a disappointing slowdown in growth and especially the forecast for Q4. Amazon expects Q4 revenues up 10-20 percent, the lowest guidance from the company since Q2 2015 (7-18 percent). Nevertheless, growth at Amazon is unlikely to fall to a structurally low level below 20 percent. The company is simply too strong, too innovative and too expansive to let this happen.
Amazon traditionally gives guidance for the coming quarter, and in recent years, the management's forecasts for quarterly revenues are increasingly good, with less change of under-estimating the growth. For example, in Q2 2015 the company forecast revenue growth of 7-18 percent and achieved a rate of 27 percent. Since Q4 2017, the difference between the midpoint of the forecast range and the actual result is much smaller, at a maximum of 3 percent points. If this holds for Q4 this year, then revenue growth could be around 18 percent.
Still, there are a few reasons why the sales growth may be slowing:
- The comparable base. The takeover of Whole Foods Market at the end of August 2017 skewed the growth. After four quarters of growing over 30 percent, the year-on-year impact has been lapped.
- Competition. The traditional e-commerce business for Amazon's own account is showing a significant slowdown, growing just 11 percent in Q3 2018 compared to 22 percent a year earlier. Traditional retailers such as Walmart and Target are stepping up the competition, as are internet companies like Google, which is cooperating more with retailers. In other parts of the business, Amazon also faces growing competition, such as the smart speakers, where Google, Apple and Facebook have all followed with their own products. Even Deutsche Telekom, Orange and Telefonica have their own smart home devices. Furthermore, while Amazon has been the big challenger to Netflix in recent years, more players are entering the streaming video market, with Disney, WarnerMedia (AT&T) and Apple all planning new services.
- Price cuts. Whole Foods did not show any quarterly growth, likely due to the price cuts implemented by Amazon.The question is whether Amazon can make this work, for example by expanding the number of outlets.
- Saturation. This is a problem for Amazon Prime, which is approaching the limits of its growth in the US. The same holds for the smart home devices (Echo), which have already reached a significant penetration in the US.
It remains to be seen what Amazon can deliver in Q4 and its plans for the future.
