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Amazon.com, Inc. (AMZN) Can’t Crack the Law of Large Numbers

Amazon.com, Inc. ’s current stock price presumes unsustainable growth because the law of large numbers will finally catch up with the e-commerce giant, Mark Hulbert, editor of the Hulbert Financial Digest, writes in MarketWatch. Investors are eager to jump on to the Amazon bandwagon. More so after initial sales figures from Black Friday and Cyber Monday show online retailers, led by Amazon, grabbing a big chunk from brick and mortar stores. But does the stock at current levels offer growth? Hulbert thinks it does not.

Amazon Inc (AMZN)

Amazon Can’t Grow to the Sky

To get a better picture of how fast Amazon.com, Inc. must grow to satisfy Street expectations, let’s look at its year-over-year sales growth. Since 2011, Amazon’s annual sales increase has been remarkably consistent. Averaging $13.7 billion a year, it ranges from a low of $13 billion to a high of $14.5 billion.

By contrast, between 2016 and 2019, Wall Street expects Amazon’s sales to grow by an average of $25.9 billion a year – almost double its past 4-year average.

Amazon bulls don’t seem fazed by the enormity of these numbers. After all, a “mere” extrapolation of the firm’s past growth rate would yield these figures. As Amazon gets bigger, the same percentage growth rate would translate to bigger sales.

But that rickety logic falls flat when pitted against the law of large numbers. Amazon would grow big no doubt. But as it does so, it would find it increasingly difficult to maintain its past growth rate. In short, Amazon can’t escape the law of large numbers.

Rivals are Getting Better

Investors also seem to be under-estimating the fact that Amazon.com, Inc. ’s sheer online dominance may shrink with time. As Nejat Seyhun, finance professor at the University of Michigan says, investors are overlooking the force with which retail rival will fight back to deny Amazon as much market share as Wall Street projects.

A decade ago, most of those rival didn’t expect online retailing to take off in such a big way. As such, they were under-prepared for the Amazon storm. But times have changed. So have these retailers.

Amazon will now have to face those very retailers, who are much better prepared to exploit Internet commerce. The days of easy picking are most likely over. The $13.7 annual sales growth was low hanging fruit. Amazon would have to leap much higher if it were to come anywhere close to what Wall Street expects.

Shares of Amazon.com, Inc. closed Monday at $664.80. The stock is the second best performing among those included in the S&P 500, with year to date gains of 117%.

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