Amazon: Morgan Stanley Says Hold on Threat of Apple Ecosystem

Shares of Amazon.com (AMZN) are down $4.90, or almost 3%, at $179.57 after Morgan Stanley’s Scott Devitt cut his rating on the shares to Equal Weight from Overweight and removed a $220 price target, writing that Apple‘s (AAPL) success with the iPhone and the iPad threatens Amazon’s sales growth and ultimately its ecosystem.

On one level, Apple is robbing Amazon of a big area of consumer spending, the iPhone and iPad, which hurts the core of Amazon’s business, the category of “electronics and general merchandise,” or “EGM,” that makes up 63% of its revenue.

First and foremost, Amazon.com is not participating in the sale of both the iPad and the iPhone. To underscore the point, Apple�s two flagship products sell multiples more on a dollar-basis than all of Amazon.com�s EGM business. With every sale of an iOS device, Apple is fortifying its moat around digital media. Interestingly enough, digital media is a small percentage of its operating income and represents an even smaller percentage of overall sales. Unlike Amazon.com, Apple does not have a physical media business that is in the process of transitioning to digital media. We believe Apple�s iTunes platform has a material advantage in the sell-through of digital music.

In the most recent quarter, Apple’s fiscal Q1, the company’s $33.6 billion in revenue from iPhone and iPad was three times the size of Amazon’s entire EGM revenue.

On a deeper level, the success of Apple’s devices threatens Amazon’s ability to sell digital media:

The second derivative impact of Amazon.com�s Apple issue is that mobile device proliferation is accelerating the shift of books, music, video and video games to digital distribution. Amazon.com is currently the market share leader in books but otherwise faces an uphill battle. We estimate that ~40% of Amazon�s media sales or ~16% of total sales comes from non-book media sales, and we believe this revenue stream is increasingly at risk to companies such as Apple, Netflix, Pandora, Spotify, etc.

Devitt cut his estimate for Amazon’s five-year compounded annual growth rate from 25% to 23%. He writes, “we expect investors may be surprised at the organic deceleration occurring in the business that may manifest itself within the CQ2 guide.”