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Amazon's growth rate could signal sales slowdown

Estimates of the company's growth rate have raised concerns among some analysts who wonder whether the online retailer's expansion beyond books has gone too far.

Estimates of's growth rate have raised concerns among some analysts who wonder whether the online retailer's long expansion beyond books has gone too far.

When Amazon reports its earnings in two weeks, analysts expect the Seattle company to post revenue growth of about 2 percent to 4 percent from $572.9 million in sales of the first quarter. In contrast, brick-and-mortar stalwarts such as Kmart and Target have traditionally posted 8 percent sequential revenue growth in the second quarter, and retail behemoth Wal-Mart has averaged about 12 percent in the past three years.

"Amazon's hit a wall," said Jeff Matthews, general manager of the Ram Partners hedge fund. "They will be a slow-growth company that doesn't make any money."

Other analysts, however, said judging Amazon on revenue growth from the first quarter to the second is an invalid method of evaluating any retailer because of the greater sales spurred by seasonal shopping.

In addition, regardless of the quarter-by-quarter debate, many analysts and others in the Internet industry argue that brick-and-mortar metrics do not apply to the new economy.

Although it is still profitless, Amazon's growth potential has been a key reason why many investors have bought its stock. While Kmart, with a price-to-earnings ratio of 10, has a market capitalization of about $3.7 billion, Amazon's market capitalization stands at nearly $15 billion. The price-to-earnings ratio is the price of the stock divided by earnings per share.

Matthews and others are calling that valuation into question, pointing to the sequential growth numbers as evidence that Amazon's business is slowing.

"If they were really a growth company, they would be growing, and they ain't," Matthews said.

The concern about Amazon's upcoming earnings comes after a slew of negative reports about the company last month that sent Amazon's stock plunging. Contributing to the downturn was a report from Lehman Brothers analyst Ravi Suria that called Amazon's credit "extremely weak and deteriorating." A report by Morgan Stanley Dean Witter's Mary Meeker said there could be some "modest downside" to her estimates of Amazon's second-quarter revenue.

Matthews said he sees a lot of downside to investing in Amazon for the long term. Business has slowed for Amazon's core book, music and video categories, and the company's new stores, such as electronics and hardware, are not working, he said.

"The only thing that works well is books, and to a lesser extent, music and video," he said. "Nobody's buying drills and saws from Amazon's Web site. Nobody's buying lawnmowers."

Shares of Amazon closed up $7.50, or 21 percent, on Friday to $42.50 following reports from analysts such as J.P. Morgan Securities' Tom Wyman and others debunking Suria's assessment and the sentiment that Amazon is running out of money. At the end of last quarter, Amazon had about $1.1 billion in cash and securities while carrying about $2.1 billion in long-term debt.

Finding the right indicator
But analysts who specialize in old-line retail companies emphasized that looking at Amazon and other stores on a sequential basis is misleading.

For example, Bernard Sosnick, an analyst at Fahnestock, said Easter tends to be a big shopping holiday, and sales can boost the first quarter or second quarter depending on whether the holiday falls in March or April that year.

"Retailers are (measured) year-over-year, never quarter-over-quarter," he said.

Even if Amazon's revenue grows just 3 percent over the first quarter, its year-to-year growth rate will be nearly 90 percent, analysts noted.

"That, in my opinion, means Amazon is still a hyper-growth company," Wyman said.

Amazon's sales may be depressed this quarter because of the amount of media coverage on the tough times facing many e-commerce companies, Wyman said. Those types of stories have shaken consumers' confidence in buying online, but Wyman said he expects that confidence to rebound by the fourth quarter.

Seasonal shopping swings
Another factor that might depress Amazon's sales is seasonal Internet usage. Many consumers buy PCs in January, which leads to a surge in Internet use and online shopping, analysts say. In contrast, the second quarter includes part of the summer, which many analysts see as a slow time for the Internet. With consumers on vacation and away from their computers, they are less likely to shop online.

"The June quarter is very different," said Daniel Ries, a financial analyst with C.E. Unterberg, Towbin. "It's different than the normal retail patterns."

But Matthews scoffed at the notion that seasonal issues are causing Amazon's slowing sequential growth. Last year, Amazon posted 7 percent revenue growth from the first to the second quarter; in 1998, the e-tail giant posted 33 percent growth for the same sequential period.

"They've never had seasonality before," he said. "They've never had a seasonal slowdown."

Amazon's performance also could be affected by its product selection. While Kmart and Wal-Mart carry products in hundreds of different categories, including many that are popular during the summer, Amazon has only about 15 product categories. In addition, items that might be popular with spring and summer shoppers--such as lawn and garden supplies or home furnishings--are fairly new to Amazon, and customers do not necessarily associate the site with such products, analysts say.

"It's almost like an apples-to-oranges comparison, (a few) categories vs. thousands of categories," said Jeetil Patel, financial analyst with Deutsche Banc Alex Brown.

Still, Patel said the key for Amazon will be in how well it mixes its new products with its traditional products, and whether it can convince its book customers to buy electronics products and vice versa.

Matthews "raises some good issues," Patel said. "Amazon's business is still growing, but can they sustain it?"'s Cecily Barnes contributed to this report.