Amazon Bull Wonders If the Stock May Become ‘Dead Money’

(Bloomberg) -- Tom Forte has recommended Amazon.com Inc. as an investment for years and the D.A. Davidson analyst is one of the stock’s biggest bulls. Now he’s pondering a perhaps unexpected question: is the e-commerce company doomed for failure?

“We are closely monitoring the company and stock for warning signs that could result in the demise of AMZN,” he wrote in a report published Thursday, entitled “The Death of AMZN?”

Shares of Amazon, the second-largest stock on Wall Street with a market capitalization of nearly $900 billion, fell 0.3% in afternoon trading.

Still, Forte hasn’t turned bearish on the Internet giant; he still has a buy rating and $2,550 price target, one of the highest around. Instead, he is considering what factors could end the stock’s decade of huge growth, and what it would mean if it went from being a growth play to a value stock.

This transition “can be a painful one” the report read. “The combination of slowing growth and the resulting multiple contraction can result in extended periods of dead money.” Forte pointed to Microsoft Corp. and Walmart Inc. as precedent for this kind of shift; while Microsoft has surged since 2016 -- and currently reigns as the largest stock by market cap -- it was “dead for multiple years” between 1999 and 2016.

To gauge whether Amazon may face a similar fate, Forte created a “dashboard” to gauge the company’s health. The primary metric involves three measures of sales growth: overall growth, and then growth in both its Amazon Web Services cloud-computing division, and in emerging categories like advertising. The issue, Forte wrote, is that Amazon could fall victim to the law of large numbers.

“In 2019, Amazon needs to generate $2.3b of incremental sales to increase revenue by 100 basis points. In three years, we estimate it will be 50% harder and in 10 years, 75% more difficult,” he wrote. “Amazon needs to enter new markets and devour the weakest players to sustain its sales momentum.”

In its most recent quarter, Amazon reported sales growth of about 17%, its slowest pace since 2015, according to data compiled by Bloomberg.

One newer market that Amazon is focusing on is grocery, which D.A. Davidson wrote “has proven to be a tough nut to crack.” The company “needs to add A LOT more physical stores to exploit the grocery category,” and this may require acquisitions.

Despite the dramatic title of the report, Forte wrote that he didn’t consider Amazon destined to stagnate. He’s “optimistic on the company’s ability to sustain an elevated growth rate” by growing in existing markets and entering new ones, supporting a “premium multiple for years to come.”

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Jennifer Bissell-Linsk, Morwenna Coniam

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