Contrarian: Amazon Is One Of The Weakest Retailers There Is

Not every day you get to hear calls concerning online behemoth Amazon.com, Inc. AMZN's weakness. Taking a contrarian view, Moody's Investor Service said in a note Wednesday that the company has a long way to go before it can dominate the retail space.

The firm has a long-term rating of Baa1 for Amazon, with the outlook remaining positive.

No Match For Big Box Retailers

Analysts Charles O'Shea and Janice Hofferber think brick & mortar stores are narrowing the online gap somewhat with Amazon. Additionally, referring to the 10-percent share of online sales to total retail sales, the analysts said big brick & mortar retailers such as Wal-Mart Stores Inc WMT remain very formidable competitors in the industry.

That said, they expect Amazon to continue to hold undisputed dominance in the online space.

Top-Line Fine, Where's The Rest Of Metrics Headed?

Moody's said apart from sales growth, Amazon's performance lags the large retailers. The firm thinks the outperformance of the company's shares has been due to its growth story, particularly its Amazon Web Services, or AWS, business.

Additionally, some support comes from the potential for future expense cut, the firm added. According to the firm, the emphasis on stock performance has forced brick & mortar competitors toward managing more irrationally for short-term performance amid the secular challenge.

See also: The Scope Of Amazon's Whole Foods Deal: Carrier's Gain Is Parcel Deliverer's Loss

Bogus Prime Membership Numbers?

Moody's estimates that Prime membership in the U.S. is close to 50 million, unlike the 85 million number floated around. In comparison, Costco Wholesale Corporation COST's FYE August 2016 paid membership number was 476 million, with the total membership count at 86.7 million.

The firm noted that Amazon never gives any guidance on this, except to characterize it as tens of millions.

"Given the company's incessant push into new markets and products, it's easy to understand temptations to overestimate," the firm added.

Laggard In Food Retailing

Moody's is of the view that Amazon might not dominate food retailing, at least within the next two years, despite its Whole Foods Market, Inc. WFM buy. Giving the rationale behind its view, the firm said the company will be left with only a smaller piece (less than $20 billion) of the total food sales of $800 billion.

The firm indicated that Walmart sells around $220 billion, Kroger Co KR around $130 billion, Albertsons Companies Inc ABS around $60 billion and Costco around $50 billion.