Rubinson's thought wasn't entirely original -- other investors and analysts have expressed
similar doubts in recent weeks and months. But his assessment, coupled with a sell rating on the company's shares, represented one of the first times a sell-side analyst has taken a skeptical view of Amazon's claim to being more akin to a technology company such as
Amazon's balance sheet and cost structure much more closely resemble companies such as
Bed Bath & Beyond
than they do even other Internet companies such as
, Rubinson noted in his report, which was issued late on Thursday.
"We have all heard the expression, 'if it walks like aduck and quacks like a duck...then it must be a duck.' To us, Amazon.com is a retailer," said Rubinson, in initiating coverage on the company. (Amazon has been an investment banking client of Banc of America in the last year.)
In recent trading, Amazon's stock was off $1.47, or 3.6%, to $38.90.
Investors and analysts have been increasingly critical of Amazon in recent months. The company has posted five straight profitable quarters, putting to rest any lingering questions from the dot-com bust about whether it can make money. But even as it quashed those doubts, others have sprung up in their place.
For two quarters in a row, Amazon has turned in a quarterly report that came in below consensus estimates and offered forward guidance that was below expectations. After the company finally started posting operating profits last year, its operating income has steadily declined on a sequential basis this year as a portion of sales.
Meanwhile, the company expects to boost both its marketing and technology spending, indicating that it doesn't see its operating margin improving much in the near term relative to sales.
The growing doubts about Amazon have been reflected in its stock price. While eBay, Yahoo! and
have seen their shares soar this year, Amazon's stock is down 26%.
Despite this decline, Rubinson is convinced that the company is still overvalued. Using a number of different analyses, including a discounted cash flow model, he estimates that Amazon is worth about $26 a share. As part of his analysis, Rubinson assumes that Amazon's revenue and earnings will grow at average annual rates of 12% and 15%, respectively, through about 2010.
One of the challenges that Amazon will soon have to face is the trade-off between revenue and earnings growth, Rubinson said. The company's average order size is far smaller than that of other direct retailers, he estimates. Rubinson's research indicates that the median -- if not the average -- order at Amazon is unprofitable for the company.
The best way for the company to turn around this situation is to increase its average order size. But that might entail dropping unprofitable products from its inventory or discouraging unprofitable, low-value orders, he said.
Unfortunately, average order size, or gross profit per order, is not a statistic that the company or analysts seem to have focused on, Rubinson said.
"We are not questioning whether the model is profitable or not. It is," he said. "Our point is simply that operating margin gains may be limited without increases in average order size."