Bank Of America: Amazon's Australian Launch Underwhelms

Amazon.com, Inc. AMZN — a roaring success in many of its ventures — hasn't pulled it off with élan this time, according to Bank of America Merrill Lynch. While Amazon said its Australian launch was its biggest international debut, one sell-side analyst disagrees. 

The Analyst

BofA analyst Justin Post maintained a Buy rating on Amazon with a $1,220 price target.

The Thesis

Amazon's new local offering should increase product availability and reduce shipping times and costs once it's at scale, Post said in a Tuesday note. (See Post's track record here.) 

Amazon plans to invest hundreds of millions of dollars in Australia, the analyst said. 

The company, though already operating the Amazon.com.au site, was only selling digital products around its Kindle devices, with physical Kindle devices sold through local retail partners, according to BofA. Australian customers previously used the AmazonGlobal section of Amazon.com to buy items, which were shipped from the U.S. and Europe.

Press reports suggested an underwhelming launch, primarily due to still-limited category availability, a high percentage of inventory from third parties and higher prices versus peers on several items, Post said. It makes sense for Amazon to rely more on third parties, given the large geographic size of the nation and the lack of population concentration. 

The analyst said he sees eBay Inc EBAY as a beneficiary of this muted sentiment toward the Amazon launch, as Australia is the former's fourth-largest market.

BofA expects more to come in 2018, as Amazon replicates its playbook in other countries and improves selections, pricing and delivery times.

Australia is a "relatively small" e-commerce market, with the gross merchandise volume valued at $14 billion in 2016 compared to $408 billion in the U.S., $268 billion in Europe and $963 billion in all of Asia, Post said. 

"We think Amazon's entry into Australia could help drive faster e-commerce growth over the next three to five years." 

Against the backdrop of expansion into Australia — and Singapore prior to that — the firm said Amazon's retail margins are unlikely to tick higher in 2018, especially with local delivery build-out and competitive pressure from Wal-Mart Stores Inc WMT.

"However, outlook for international GDP is positive, and we think Amazon may continue to get a free pass on international margins in 2018 if international growth accelerates and U.S. retail margins stabilize," Post said. 

"We continue to like the stock, as global e-commerce is still early vs. other categories, and Amazon taking share."

The Price Action

Amazon shares are up about 20 percent year-to-date.

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