Amazon is coming, and Morgan Stanley analysts say Wesfarmers Ltd (ASX: WES) is standing in its way.
Who is Amazon?
The US-based Amazon is one of the world's largest companies worth around $475 billion ($642 billion). However, some analysts believe it will be the first company to officially be worth $1 trillion as its sales and investment in itself continues to accelerate.
Amazon shares are up around 57,500% since the late 90's, not including three share splits.
In all respects, Amazon has redefined the way the USA shops, challenged the commonly accepted belief that profits are vital to company success and augmented the digital customer experience.
The bad news for the likes of Wesfarmers, JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) is that Amazon is making its move down under.
Analysts downgrade Wesfarmers
As the global giant eyes the Australian retail market, analysts at Morgan Stanley have tried to assess the impact on Wesfarmers, according to Fairfax Media. The analysts believe Amazon will cost Wesfarmers $400 million in operating profit by 2026.
Wesfarmers is the owner of Kmart, Target, Officeworks, Bunnings Warehouse and more. The analysts drew attention to Kmart and Target as the key weaknesses to Wesfarmers' current valuation.
"We believe that Wesfarmers' department store businesses Kmart and Target are particularly susceptible as Amazon rolls out its first party product and its Prime offer," Morgan Stanley analyst Tom Kierath was quoted as saying in Fairfax.
"Based on our estimates for Amazon share gains and incremental margins, we see Wesfarmers losing $400 million in EBIT by 2026 and have lowered our valuations for Kmart, Target and Bunnings."
The analysts say Target is worthless, while Kmart is worth $3.4 billion under their revised models. They expect Amazon to soft launch later this year
The analysts also expect slowing house price growth will hamper the growth and profitability of Bunnings Warehouse.
Foolish Takeaway
Analysts are paid to make forecasts. However, it's vital to consider a range of views and make your own informed investment. Although the Morgan Stanley analysts have downgraded Wesfarmers' shares, there is still a lot to like about the company.
Nonetheless, shares are not in the buy zone, in my opinion.
