An Internet Retail Trailblazer
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. Fresh off an average third quarter earnings report, I would like to pinpoint on the revolutionary online retailer, Amazon.com (NASDAQ: AMZN).
- Fast-Paced Sales Growth: In 2007, Amazon reported sales of $14.84 billion; in 2011, the company reported sales of $48.08 billion, representing year over year annual growth of 34.17%, an astonishing rate that is projected to sustain into the near future, with estimations putting 2014 sales at $98.48 billion
- Industry Trailblazer: Amazon’s revolutionary idea of shifting the shopping experience to the internet has destroyed several conventional brick-and-mortar stores while driving significant traffic to their website
- Kindle Line: The Amazon line of devices has proven its importance over and over again, and the new line of Kindles should continue in the footprints of their predecessors
- Cash on Balance Sheets: Currently, the company possesses around $9.58 billion of cash, cash equivalents, or investments, and this cash on hand can create a cushion for the company to fall on in times of downfall
- Institutional Vote of Confidence: 67% of shares outstanding are held by institutional investors, displaying the confidence long-term and big-money investors have in the company and its future prospects
- Vast Overvaluation: The company currently carries a price to earnings ratio of 3,045.18, a price to book ratio of 13.27, and a price to sale ratio of 2.13, all of which point to the fact that the company is vastly overvalued
- Scrawny Margins: The company’s net profit margin is only 1.31%, leaving little room for unexpected expenditures; these scrawny margins are a result of Amazon’s effective business model that sacrifices profits for volume
- Vulnerability to Economic Downfall: The company’s success is contingent on people purchasing items on their website, and in times of economic downfall, less people have the money to spend on luxuries, and thus Amazon has less customers
- Lack of Dividend: Currently the company pays out no dividend and has expressed no plans of doing so anytime in the near future
- Acquisitions: In June, Amazon acquired the publication rights from Avalon Books for over 3,000 titles, and further acquisitions in the future is probable
- Product Innovation: The Kindle line was a company innovation on the e-reader and tablet products of the world, and further innovation is highly expected as the global technology market accelerates its pace of innovation
- Emerging Market Growth: The growing middle classes in markets such as China and South America should fuel broader company growth as adoption of Amazon in these countries is nowhere near where it is in the United States
- Capturing Market Share: This upcoming holiday season more customers than ever are expected to purchase their gifts online, and if Amazon is able to capture market share they will see an increase in sales
- Proposed Sales Tax: Certain states have proposed a sales tax on items sold on Amazon, as they state it is not fair for retailers that sell goods from a physical location, and if this tax was to be approved it would erase one of the main advantages of shopping on Amazon
- Competition: Amazon is not the only online retail store in the world, and other companies have desperately tried to duplicate Amazon’s success, and this competition can may times lead to margin contraction
- Sluggish Economic Conditions: Much of Amazon’s success is dependent on consumers buying on their website, and if the economy is in a stagnant condition, less people will buy things on their website as they do not have the money
- Failure of Strategy: Amazon’s kindle devices are so inexpensive because they are sold by Amazon at the cost it took to make them, therefor Amazon relies on the owners purchasing apps or books on their app store to create revenue, however if this strategy was to fail they would be making no money on their most important line of products
Major publically-traded competitors of Amazon include MercadoLibre Incorporated (NASDAQ: MELI) and eBay Incorporated ). MercadoLibre is worth significantly less than Amazon, and is in essence the Amazon of Latin America. The company carries a much more reasonable valuation and pays out a small dividend. eBay competes directly with Amazon in the internet retail space, and like Amazon possesses astonishing growth.
The Foolish Bottom Line:
Amazon possesses several strengths, weaknesses, opportunities, and threats; however in the end appears to be an industry trailblazer that has forever changed the shopping experience. However, the current valuation of the company is absurd. If the company is not able to live up to its sky-high expectations, I fear the company will be attacked by short sellers, much like Netflix and Green Mountain were. One must believe unwaveringly in the company’s growth prospects to invest in the company, and unfortunately I believe the stock is just too grossly overvalued. However, when the stock becomes more reasonable priced, I believe it is a great investment for the coming century, and the future of the retail industry.
Know What You Own
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makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and MercadoLibre. Motley Fool newsletter services recommend Amazon.com, eBay, and MercadoLibre. 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.If you have questions about this post or the Fool’s blog network, click here for information.