Amazon Kindle Dumped by Wal-Mart: Competition Soaring

By Jhumpa Sarkar - September 27, 2012 | Tickers: AMZN, TGT, WMT | 0 Comments

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Amazon.com (NASDAQ: AMZN) is likely to be hit as retail giant Wal-Mart (NYSE: WMT) announced that it will no longer be selling Amazon's Kindle products, once its current supply runs out. This highlights the competition between the online retailer and physical retail chains or the brick-and-mortar stores.

Wal-Mart is not the first retailer to discontinue selling the Kindle line. Earlier in May Target (NYSE: TGT) announced the similar decision. Both the companies will continue to offer other tablets and e-readers.

Following the announcement, Amazon's shares were down by 1.28% to $257.47. But what could be the possible reasons behind Wal-Mart dumping Amazon?

• Amazon competes against Wal-Mart indirectly and directly on many fronts. Both Wal-Mart and Target obviously did not want to help their major competitor by showcasing the products in stores which later on to be purchased online through Amazon. With more consumers browsing in stores but making purchases online, retailers face the risk of declining sales.
• Amazon’s strategy to sell the e-readers and tablets at lower margins compared to the other tablet makers weren’t really appealing to Wal-Mart. So, the pricing dispute was there.
• The Kindle line didn't sell much at stores as the users find it much easier to buy from Amazon.com as these products (tablets, e books and digital content) are seamlessly integrated into Amazon's online store. Amazon sells Kindle at much lower margin or even at break-even and then later make profit through selling digital contents. 
• With Wal-Mart looking to build up its online business, Amazon is its biggest competitor.
• Wal-Mart may want to increase the Apple products in store just as Target did to build a strong alliance with Apple.

It is very likely that loss of Wal-Mart will result in fewer Kindle products sold. Since Wal-Mart and Target will still carry competing tablets and e-readers, some customers (who prefer to buy from store) may buy these devices instead of Kindles. Sales of Google's Nexus 7, Barnes & Noble's Nook or Apple's iPad may prosper in both the stores in Kindle’s absence. Amazon would miss this opportunity and this could adversely affect sales of the Kindle. The slowdown in revenue growth would be reflected in the Q4 results.

Amazon faces similar risk outside of retail too. In its core business selling books, Barnes & Noble stopped carrying Amazon books after Amazon expanded its publishing efforts.

The retail environment is getting very competitive. Wal-Mart is facing tough completion from the online retailer which has been selling everything cheap at lower margins. In the past few years, Wal-Mart has been losing out U.S. market share to many of its rivals. Target has done better with same-store sales. Wal-Mart has also been losing revenue to e-commerce leader Amazon for non-grocery items like furniture, electronics and school supplies. In this scenario, Wal-Mart is looking to build up its online business through its website with strategies like offering free shipping with certain minimum purchases and waiving off shipping fees for shoppers who pick up their items in a Wal-Mart store. Wal-Mart still holds a place as one of the two largest online consumer electronics outlets in the United States, rivaled only by Amazon and Best Buy. Wal-Mart’s ecommerce business grew at or above ecommerce rates in the United States during the first half of the year, taking market share from competitors.

Currently, Amazon is largely overpriced. The stock price has increased 48.5% YTD. It seems Amazon is richly priced due to the investors’ enthusiasm about Amazon's Kindle business and its growing cloud services business. From the chart it can be seen that Amazon’s stock price has increased 151% in the last 5 years while stock prices of Wal-Mart and Target looks relatively flat despite better margins.

Amazon’s P/E ratio is quite troubling at 304.1. Wal-Mart and Target both trade at healthy earnings multiples in the mid-teens based on earnings estimates for their next fiscal year. Amazon’s EPS is the lowest at $0.82, compared to Wal-Mart’s $4.74 and Target’s $4.36. Amazon’s operating profit margin, net profit margin and ROE are lowest amongst the three companies. The fundamentals show that Amazon's competitors are growing faster than Amazon.

However, Amazons 29.5% sales growth in the past quarter, YOY is the highest, followed by Wal-Mart’s 4.5% and Target’s 3.3%.

Conclusion

With retail environment getting very aggressive, Amazon faces stiff competition from the retailers. Most likely its Q4 revenues will be impacted for losing out a large channel like Wal-Mart. Despite its dismal margins compared to its competitors, the stock price has risen by 48.5% in 2012. It is the right time for the investors to book profits at the current prices as a small drop in revenue or gross margin can lead to a large drop in the stock price.

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