First Adopter’s Amazon Short Thesis
- Joshua M Brown
- March 12th, 2012
As I talk about here and elsewhere relentlessly, the vast majority of sell-side research from Old Wall Street really and truly sucks. I find it to be valuation-based, unactionable, non-creative and mired in the kind of discounted cash flow analysis they teach everywhere from Penn State to the University of Phoenix Online. if everyone is running the same spreadsheet and calling it research, then no one has anything to say that I need to hear.
And then every once in awhile, something like this comes along in the financial blogosphere, from an anonymous cat named First Adopter, and you say to yourself: "What if Wall Street research was actually more like this? How much more valuable and interesting would things be?"
First Adopter has triangulated almost every data point on Amazon's ($AMZN) retail business and has come up with a secular short thesis that all buyers and sellers of this stock should be digesting right now. A taste before I send you over:
Poorly Positioned in the Shift from Physical Media to Digital Media
One of the biggest trends in the past couple of decades is the shift from analog to digital. In a similar vein, there is a huge secular shift today from physical media to digital media. People are moving from physical books, DVDs, videogame discs, and CDs to e-books, online video, digital videogame services, and iTunes.
Already the growth deceleration in physical media is showing up in the numbers. Amazon’s North America Media sales growth slowed to 8% y/y in Q4-2011. Amazon blamed poor sales of videogames as a factor. This isn’t going to get any better in Q1-2012 as NPD videogame sales were down 38% y/y in January (Link) and down 23% y/y in February (Link).
The problem for Amazon going forward is a significant portion of their current revenue is still from physical media, so they need to dominate the secular shift to digital. Unfortunately for Amazon, the elephant is the room is Apple.
In the CDs to digital music shift, the game is already over with the power of Apple’s iTunes/iPod ecosystem. Amazon has no chance to compete. In the DVDs to digital movies shift, Apple already has 75% market share of all movies bought online (according to a Hollywood source Link) and this is even before Apple has launched a true Apple branded TV which is slated to come out within a year.
Amazon doesn’t really have a digital gaming download strategy (other than a small PC games download business) and will be locked out in the future when/if Microsoft or Sony goes digital only with the next generation consoles. Also as more interactive game spending goes purely digital to MMOs, Facebook, and tablets, Amazon market share of videogame business will continue to decline.
In terms of e-books, Amazon has dominated this business due to the success of Kindle e-readers in the past few years. Unfortunately for Amazon, this too is now significantly at risk as the world is moving away from dedicated e-readers and to full featured tablets. Taiwan based E Ink Holding which provides black and white e-ink displays and counts Amazon as a large customer reported December 2011 revenue down 57% y/y (Link).
This is one of many points he makes in his piece, it is meticulously researched and written in plain English. I have no position in $AMZN at the moment but I find many of his points compelling to say the least.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.