Amazon's Still Facing an Identity Crisis
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A week ago I shared a less-than-enthusiastic view of Amazon.com's (NASDAQ: AMZN) future. I didn't bring the proverbial hammer down. But, I didn't pull any punches either, observing that the company's heavy spending on the development of the Kindle Fire and the establishment of new fulfillment centers (aka warehouses) was starting to take a real toll on earnings. That's no problem if the investment is (1) a temporary outlay, and (2) produces a decent return. The problem - my problem - was simply that I had my doubts on both fronts.
That opinion sparked several, shall we say 'colorful disagreements'? That's ok. In fact, I like healthy debates... especially ones where both sides of the table can gain some perspective and knowledge.
Well, having had a week to think about all the feedback I got after sharing my side of the story, I can now say...
...I haven't changed my mind about Amazon. It's still a fine company, but gone are the days where that triple-digit (or at least well above the 80's) P/E ratio can be justified by admittedly-impressive revenue growth. I have, however, better defined my argument thanks to some help from Apple (NASDAQ: AAPL) that couldn't have been better scripted.
One of the things I specifically said in the last write-up: "Perhaps we've finally reached the point where Amazon can't fruitfully out-size and out-spend the competition." I followed that up in the comments section with "The plan for now is to reel in spending by 2013, but what happens when Apple and other hard-goods retailers up the ante and Amazon has to upgrade the Kindle Fire to something else and start the R&D and expansion game all over again."
Keep the key words "fruitful" and "out-spend" in mind for a moment.
Like clockwork, between then and now Apple did the very thing I warned about. Yes, the world's biggest consumer technology is rumored - though it's one solid rumor - to be developing a 7 inch iPad that will be able to compete head-on with Amazon's Kindle Fire. The device is likely, though not absolutely certain, to cost at least a little more than the Kindle Fire, but it's also sure to cost considerably less than the lower-end iPads currently priced around $500.
So now what does Amazon do to stay competitive against the most competitive technology company in the world? That was my point all along - there is no endzone.
Amazon probably did "out-spend" (relatively) the competition with the development and prep-work for the Fire, but with Apple now talking about a 7 inch tablet, Amazon's Kindle Fire work isn't going to be nearly as "fruitful" as first imagined. So, Amazon is forced back to the drawing boards to work on its next great idea.... not to get ahead, but just to keep up. The effort will likely cost another big chunk of money, and it will also take time. That's not to say the effort won't work, but let's face it - Apple's got a lot more experience with product development than Amazon does, and with one swift blow just kiboshed a big chunk of Amazon's proposed future. Ugh. Yet, it's likely to keep happening again and again; that's just business.
The other point I made a week ago was that although the establishment of several new fulfillment centers was a customer-centric action from Amazon, it wasn't necessarily a fiscally sound one.
Geographically speaking, yes, the more FCs that are, out the lower the distance-based shipping costs get. That's not just for the customer's benefit, however. With the heavily-pushed 'Amazon Prime' program (at $79 per year) offering free shipping, anything that can help lower Amazon's costs is a good thing.
There's a flipside to that coin though... will it actually save Amazon any money? Assuming a bunch of pickers/packers making $10 per hour plus a fulfillment center management team plus utility bills plus rent or mortgage payments, there may not be a significant fiscal net benefit. One also has to wonder if free shipping will spur a whole lot more purchasing, which is great from a retail sales perspective, but how many items can Amazon afford to ship for free before eating those costs is no longer 'worth it'? That $79 per year may not go far when it also includes access to a ton of digital content like TV shows and e-books. [I don't think anybody really knows the answer, including Amazon.]
Again, I don't think Amazon is a bad company. I just don't think it's a great company anymore now that it's all grown up and has to get this creative - something it's not got much experience with - to continue pumping up its top line. Apple just undid a year's worth of work on the Kindle Fire, which was the necessary centerpiece for Amazon's budding digital content ecosystem that was hoped to rival Apple's. Now what?
Yeah, the party's over. Now Amazon is just another e-commerce stock with a rather high P/E, no clear competitive advantage, and no clear end to the need for development-spending. You can find plenty of those, and at a much lower price.
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