Is Amazon Living Up To Its Name?

Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Online retailers have played a crucial role in making shopping easy for us. Nobody could have thought of buying anything at just the click of a mouse. Moreover, the convenience came in at a lower price too, since these retailers were not like the traditional ones who have to splurge on maintaining their stores.

Emergence of online giants such as (NASDAQ: AMZN) has given a hard blow to retailers such as Wal-Mart (NYSE: WMT), who fail to keep their prices as competitive as the former. Moreover, Wal-Mart and other similar retailers have been suffering from the problem of “showrooming,” wherein customers try the product in its stores and then buy it online. Huge costs made it difficult for Wal-Mart to make its prices competitive to Amazon so much so that Wal-Mart has started keeping smaller stores. These stores are more accessible to the customers as well as low on cost.

In fact, the online giant has not only given stiff competition to other super market operators but also companies such as Best Buy and Barnes & Noble (NYSE: BKS) who are facing problems in selling electronics and books, respectively. Barnes & Noble has been witnessing sharp decline in footfall since people find it easier to read books online. With the emergence of e-books, people don’t even have to carry the books with them. However, Barnes & Noble has been able to find a way out and has taken initiatives such as the launch of Nook, an e-book reader, which can prove to be detrimental to Amazon’s Kindle sales.

Some Obstacles Seen…

Because of Amazon’s unique business model, the company was enjoying a number of benefits, the most important being the absence of sales tax. This enabled the retailer to offer lower prices and attract customers in hordes. However, with the imposition of sales tax on Amazon recently by the Government, there seems to be some respite for these retailers. This will act as a major obstacle for the online giant since this will make Amazon’s products expensive.

It seems that the new rule has already affecting Amazon. Its recent results failed to meet analysts’ expectations as the earnings took a sharp dip of 45% over last year. But the most interesting part is that though the company registered a lackluster quarter and gave a dull outlook, its stock prices shot up. This is mainly because of the company’s stunning operating margins as well as investors’ belief in Amazon’s future.

What Next?

Amazon has a number of moves in place which will benefit the retailer overcome the drawbacks of the new sales tax ruling. It recently launched the new Kindle Fire which has been able to lure customers because of its lower prices. The affordable tablet is hugely ad-supported and is not restricted to the American region only.

The company has been eyeing to expand its geographical footprint through its new tablets. This will create more avenues of growth for the retailer.

The expansion is not limited to adding new regions and tablets but also distribution centers. In order to provide better service and make its products delivered faster to customers, the company is adding new distribution centers.

Amazon is also trying its best to make its products better in all ways. Its efforts in enhancing the tablet include new introductions such as AutoRip, which provides MP3 versions of songs bought on Amazon, kid’s service and text to speech features. It is also offering digital library on its tablets. These inclusions might lure more people to the sizzling market of Kindle Fire.

The Bottom Line

Slight increases in product prices and poor guidance might be some negatives which are making this company look dull but its unique business model and continuous increase in operating margins is something which shouldn’t be ignored. Additionally, the company provides the convenience of having a wide variety of products at consumers’ finger tips. It is also strengthening its distribution network in order to reduce the lag time of delivering the products.

These initiatives along with Amazon’s expansion initiatives make me believe strongly in the company. Investors should consider this stock as a long term investment.

justhimanshu has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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