These Two Things Must Continue for Amazon to Succeed
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) investors are filled with excitement at the possibilities of where the company can go! Does it get any better than this with Q1 2012 revenue growing to $13.18 billion, up 34% year-over-year? Electronics and other general merchandise sales grew around 43% in the North American and International markets. Yet one little grey cloud looms in its bright sky! Its operating income declined significantly due to margin pressures. Amazon’s valuation is extremely sensitive to changes in profit margins, and margins need to improve before long term caution can be lifted. What needs to happen for Amazon to take off for good?
Continued Cost cutting Efforts
The company continues to work on margin and cost cutting efforts as well as efficiency. One of the biggest steps it made here was when it bought Kiva to help with its warehouse efficiency. These are important steps and prove the company has vision and knows what it needs. But its main drive to access media for sales, the Kindle, may be the greatest need for the company.
Kindle has to succeed
Part of Amazon’s tight margin is its need to sell Kindle under cost. Obviously the more Kindles that are sold this way, the tighter its margins are going to be.
But Apple (NASDAQ: AAPL) threatens the Kindle as it attempts to position the iPad as an all-purpose tablet, instead of just a content consumption device. The Kindle lost market share in the first quarter of the year dropping to 4% from 17% in the last quarter of 2011. Yet — Apple continued to dominate the first quarter.
Amazon has to be able to compete with the Kindle Fire strategy appropriately. Even though it sells below cost, it is the main driver for growing media sales, currently 30-40% of its overall revenue. The company won't be able to deliver revenue growth of 20% year-over-year if media is falling. A new Kindle will be coming out. It may be subsidized also, but it needs to be innovative. It needs easier navigation and a larger screen. After all, rumors of a mini-iPad swirl, Amazon may have to announce a larger product to keep Apple from taking even more market share than it already has.
Amazon continues to produce. Its Media sales, which comprise e-content, books, DVDs and music, grew 19% this quarter. A strong Kindle will continue to drive revenue growth for the company as a whole. Amazon Web Services was the fastest growing business of the company, it still accounts for just a fraction of its total revenue but that can increase. If the company does things right, it has the opportunity to become one of the dominant global cloud platforms!
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