Amazon (Nasdaq: AMZN)
has been hailed as the king of the e-commerce hill.
After all, it pioneered the industry, gaining a
competitivemarket share in nearly every field it's asserted
itself. But as with any company, size and time seem to have
caught up with Amazon, knocking it down a notch.
This pessimistic stance on the company is likely to ruffle
feathers. But before dismissing the idea that Amazon is anything
but bulletproof, consider three realities that would be deemedred
flags for any other company.
1. Contempt for partners
A few weeks ago, Amazon announced it would raise fees for some
third-party sellers. For example, the price to list some
electronics accessories reportedly jumped from 8% to 15%. The
company cited rising fuel costs as one reason for the fee
The most affected sellers cried foul and threatened to take
their business elsewhere. Often, customers complain about higher
prices without changing their behavior. But these may not be idle
threats -- alternatives exist. Competitor
eBay (Nasdaq: EBAY)
offers a comparable service, and lowered its listing fees shortly
after Amazon's increase.
Google (Nasdaq: GOOG)
also provides an e-retailing venue demonstrated to be more
cost-effective than Amazon's charges to third-party
While Amazon may raise its fees, that doesn't inherentlymean
the end of the company. But it does suggest some lack of regard
for its partners. Amazon chose to build dozens of new fulfillment
centers andoffer free shipping for "Prime " customers. Now it's
shoving those costs onto retailers who had no say in the matter.
It's not exactly a move that makes newcomers want to do business
with the company, and considering third-party sellers drive
nearly 40% of Amazon'ssales , this is no small matter.
2. Lack of focus
In Amazon's early days, when it was just selling books and
electronics from only a few warehouses, business was simple,
straight forward and reasonably profitable. But Amazon evolved
into the business of e-books, digital streaming video, cloud
hosting services, tablets and, most recently, smartphones. Those
industries are already saturated and not particularly high-margin
businesses. Net margins from
Netflix (Nasdaq: NFLX)
, for example, are around 6% in a good year.
The problem? Amazon could fend off new e-commerce competition
just by overwhelming newcomers. But it's unable to do that on the
digital content and consumer electronics front, where bigger
competition is already established.
A look at Amazon's numbers shows that its 2010revenue of $34.2
billion climbed to $61 billion in 2012, whileoperating income
dropped from $1.4 billion to $676 million, respectively. These
new ventures are proving very expensive.
3. No longer shielded by a wide moat
Not only is Amazon facing competition in its new ventures such as
digital content and consumer electronics, its core
e-commerce/delivery business is starting to feel pressure.
Amazon's early investors enjoyed a "wide moat" -- no other
e-commerce name had the wherewithal to rival Amazon's dominance
in the books or electronics markets. And the company kept
competition at bay for years. But within the past couple of
years, some deep-pocketed e-commerce names have started to make a
dent in Amazon's third-party seller business.
Google is one of those threats.
is also turning the heat up with its Wal-Mart Marketplace, where
third-party sellers can offer their goods online through the
company's website. Although only six merchants are on board, more
are rumored to be on the way -- Wal-Mart is reportedly pickier
than Amazon about its third-party vendors.
Neither Google nor Wal-Mart generate anywhere near the
e-commerce business that Amazon does on an annualbasis .
Wal-Mart's Web-driven revenue of about $9 billion in 2012 was
dwarfed by Amazon. On the other hand, Wal-Mart got serious about
its e-commerce channel in 2012, when it hired more than 15
engineers to build a search engine to spur more e-commerce
Timewill tell how the competition plays out, but with the likes
of deep-pocketed Wal-Mart and Google ramping up their
online-sales efforts (especially through third-party sellers),
Amazon's "wide moat" is no longer so wide.
Risks to consider:
Threats or not, Amazon is one of those few companies that can
mustersupport based on nothing more than a premise. Given
thestock 's history of blind bullishness, it's possible themarket
could come up with reasons to ignore these challenges.
Action to take -->
This isn't to say Amazon is on its death bed. Indeed, the company
will likely be around for a long time. But its era of dominance
is over, and it's no longer a must-have growthinvestment .
There's no need to sell it immediately, but now's the time to
start opening your mind to stronger e-commercestocks that could
outperform Amazon in the future.
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