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The investing world may go gaga over the rapid emergence and acceptance of Amazon (AMZN - Free Report) and be enamored by its 94% share price gains in two years against 10.5% decline in SPDR S&P Retail ETF (XRT - Free Report) ,butthere is a section that still doubts this monumental success. Moody’s Investors Service falls in this category. Let’s delve a little deeper”:

Still Low Online Penetration in the United States

As per Moody’s, Amazon.com Inc. is far from ruling the U.S. retail market: “Online sales still account for only about 10% of overall U.S. retail sales, with a much lower percentage in the grocery segment, leaving the big brick and mortar retailers, led by Walmart (WMT - Free Report) , still really formidable competitors in the industry," as noted by Moody’s. This makes the e-commerce behemoth’s foray into the grocery segment with the Whole Foods acquisition appear not as profitable as many thought it will be (read: Tough Time Ahead for Grocery Stocks and ETFs?).

Amazon’s Top Line Promising, Bottom Line a Drag

Moody’s went on to explain that Amazon is doing great on sales growth but not on profitability. The company reported earnings per share of 40 cents, way below the Zacks Consensus Estimate of $1.40 and down 77% year over year. Revenues climbed 25% year over year to $37.95 billion and topped the Zacks Consensus Estimate of $37.21 billion.

In comparison, Target (TGT - Free Report) , Nordstrom (JWN - Free Report) Home Depot (HD - Free Report) and Wal-Mart beat our earnings and revenue estimates on both lines. Nordstrom raised the lower end of its earnings guidance for fiscal 2017 too. Investors’ unloved bet Kohl's Corporation KSS also beat the Zacks Consensus Estimate on the bottom line by a nickel while revenues came in slightly higher than the Zacks Consensus Estimate by $6 million (read: Solid Q2 Revenue Beat Fails to Boost Retail ETFs).

Amazon's Prime Membership Exaggerated by Analysts?

Some market watchers estimate Amazon's Prime membership base as high as 85 million. But Moody's calculations show Prime membership somewhere around 50 million against Costco's paid membership of 47.6 million and total membership of 86.7 million as of the fiscal year ended August 2016, as per the source.

Wal-Mart Not Amazon Has Upper Hand in Food Market

Last but not the least, Moody’s noted that U.S. food sales total about $800 billion a year, of which Walmart takes about 25%. Kroger is responsible for about $130 billion while Albertson's accounts for about $60 billion and Costco about $50 billion. Moody’s agreed that Whole Foods provided Amazon with an important crucial brick-and-mortar presence, which should prove beneficial for the latter.  Moody’s sees that “even with Whole Foods in its basket, [Amazon’s] food sales still amount to less than $20 billion annually."

However, Moddy’s is bullish on Amazon Web Services or AWS, which constitutes a significant portion of the company's operating income. Amazon's cash cushion and excellent liquidity profile are also well liked by Moody’s.

Traditional Retailers Cashing on Amazon Success

Investors should note that traditional retailers are capitalizing on Amazon’s popularity lately. For example,Kohl’shas formed a partnership with Amazon under which the former will start selling Amazon devices, like Echo and Fire tablets, at 10 stores in Los Angeles and Chicago from October. Prior to this, in July, Sears SHLD entered into a deal to sell its Kenmore home appliances on Amazon.

Inside the Stock’s Unimpressive Scores

Amazon has a Zacks Rank #5 (Strong Sell) with a Value and Momentum Score of F. Only a Growth Score of A looks promising. The company’s Zacks Industry Rank is in the bottom 41%, at the time of writing.

ETF Strategies

Investors may be cautious on ETFs heavy on Amazon given the above-mentioned analysis. VanEck Vectors Retail ETF (RTH - Free Report) , Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS - Free Report) . AMZN holds the top spot in these funds with a double-digit exposure each.

On the other hand, ETFs like First Trust Nasdaq Retail ETF (FTXD - Free Report) , XRT, PowerShares Dynamic Retail Portfolio ETF (PMR - Free Report) and Consumer Staples Select Sector SPDR Fund (XLP - Free Report) can be considered for gains. FTXD is low on Amazon while PMR, XLP and XRT do not have it in their top-10 holdings.

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