Amazon Goes Google

It seems like my local bookstore is about to give up selling books. Whenever I go there, they’ve added a new category of merchandise. You can now get lattes, DVDs, CDs, t-shirts, Winnebagos, you name it. If you want to pick up the latest John Grisham AND a blender, this bookstore’s got you covered.

That’s why I love Amazon. It’s easy. It’s clean. I don’t have to speak with anyone. That’s about all I ask from a bookstore.

But for the life of me, I don’t get Amazon’s stock. As a business, the company simply ain’t that great. Amazon just reported earnings, and their profits dropped by 32%. Youch! But Wall Street is partying like it’s 1999 because AMZN beat expectations. Sorry, fells but I’m not impressed. Expectations are already so low, it’s like being surprised by the crisp cinematography of the latest Ben Stiller movie.

The problem I have with Amazon is that they rely too much on gimmicks. Businesses can use gimmicks, but they can’t live off them. Amazon’s sales were up 26% last quarter. That’s not bad, but a lot of it was due to aggressive discounting. They can’t do that forever.

Their new Amazon Prime program gives you unlimited two-day delivery for $79 a year. Again, that’s nice, but that’s all that Bezos & Co. want to talk about. I’m suspicious of any company that tries to discount its way to profitability. To win in the long run, a company needs to have something that sets them apart. Something that their competitors can’t do.

The biggest problem that Amazon faces is that its profit margins are shrinking. In fact, Wall Street is celebrating today because overall margins widened by a tad. But let’s add some perspective, their margins have, for now, briefly stopped falling. That’s not the same thing as growing. Amazon’s margins are still lower than they were one year ago.

Where are the future sales going to come from? Foreign sales were up 50% last quarter, but in North America, sales were up just 21%. It won’t take long for foreign sales growth to level off. Plus, North American operating profits were only up 9%. Once again, shrinking margins.

Future revenue could come from “third-party sales.” In essence, Amazon is slowing becoming “Googlized.” Third-party sales are when other companies rent space on Amazon’s site, or Amazon gets a commission of other company’s sales. It’s a fast-growing part of Amazon’s business. This is intriguing and certainly worth paying attention to, but Amazon’s core business is not growing like it should. Either Amazon will prove it can grow without discounting, or its stock will be the one that’s discounted.

My advice is to enjoy the service, but steer clear of Amazon’s stock.

Posted by on July 27th, 2005 at 2:27 pm

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