Articles filed under "amazon"
Even if it’s going to be ultimately successful as a company, Amazon (AMZN) in these formative years requires some myth-making – a narrative propellant to belief and momentum and human potential, no less, a story so compelling it chases away the non-fiction killjoys of profit margins, generally accepted accounting principles and conventional thinking.
In case you haven’t been paying attention, the narrative around Amazon is growing more complex – Stieg Larsson fans, pull up a chair – as it must: simply dominating online retailing, which by the way Amazon has accomplished without becoming wildly profitable, would no longer hold the attention of stock-as-a-story devotees. No, now the storyteller has added other dragons to be slain, and all the monsters are somehow related; Amazon must win every battle to prevail in multi-front war.
Stay tuned, kids, every 90 days there’s a new chapter. But unlike you’re favorite book, there’s no sign of an end to the story.
The new challenges:
--Amazon Web Services, an unlikely adjunct to a retail operation in that it rents out server capacity (a commodity service with inevitably declining prices and most likely ever-narrowing margins), is engaged in a bruising price war that will contribute to near-term corporate losses. Amazon recently cut prices for computing storage customers by between 28% and 51%, competing against Google (GOOGL), Microsoft (MSFT) and others. Sure, Amazon is big and powerful, but its opponents in this particular arena have lots more staying power, in the form of cash and short-term investments.
As if the public heat from playing hardball with book publisher Hachette wasn’t headache enough, Amazon (AMZN) now has to face the ignominy of suddenly being attractive to, gulp, value investors.
The managers of the Oakmark and Oakmark Select mutual funds just revealed that in the second quarter they established sizable Amazon positions. The $15 billion Oakmark fund had a 2.1% stake at the end of June, and the more concentrated $5.7 billion Oakmark Select established a 4% position.
Oakmark certainly had a lower entry point to capitalize on. At its second quarter low in early May, Amazon stock was trading nearly 30% below its late January peak, though it has recovered some since.
GNC Holdings (GNC), the vitamin and supplement retailer with 8,500 locations here and abroad, likes to remind investors of its “commanding market position,” adding in its 10-K filing that its domestic retail network is about ten times larger than the next-biggest competitor.
Does that make GNC the 800-pound gorilla, or perhaps a sitting duck?
After an April 2011 IPO, GNC shares soared like a rocket, until late last year when they began a sickening slide.
GNC is having a tough time growing just now, but remains highly profitable. If GNC is merely going through a rough patch, the stock, priced at a forward PE ratio of just 12, could be a steal. But there are a number of worrying developments around GNC. And its lush margins are a magnet for smaller competitors.
The 24% year-to-date plunge in Amazon (AMZN) shares is, by itself, not so significant in the stock’s volatile and curious history.
Between October 14, 2011 and the end of that year, for instance, Amazon shares fell 30%. But each price break is certainly time to reassess one of the most bizarre and fascinating companies in recent American history. As we’ve written about repeatedly – see YCharts’ Amazon library here – investors are so enamored of the company’s sales growth and how cool and disruptive its business model is, that lack of profits hasn’t been much of a problem for the stock. Until it is. Maybe that moment is now, or at some point in the not-too-distant future. So, some discussion of business fundamentals is in order.
For starters, there is no arguing that Amazon is upending the retail order, forcing giants like Wal-Mart (WMT), Target (TGT), Best Buy (BBY) and many others to invest heavily in online operations and to simultaneously cut their prices, squeezing profit margins that at this point in an economy recovery ought to be widening.
Downgrading Wal-Mart (WMT) stock to underperform this month, William Blair & Co. analyst Mark Miller, as is his habit, dwelled at length on the growing advantage enjoyed by Amazon (AMZN) over big box retailers Wal-Mart and Target (TGT).
Amazon’s merchandise selection and prices increasingly compare favorably to both the bricks-and-mortar presence of Wal-Mart and Target and to the traditional retailers’ websites. Although Wal-Mart continues to dwarf Amazon is overall size, the market share shift that’s occurring is unmistakable (Amazon reported a 23% jump in first-quarter sales on Thursday).
But Miller, the analyst, also highlights a growing threat to Wal-Mart – both its domestic business and its international one – from Alibaba, a company known to most U.S. investors as what’s helping to prop up Yahoo’s (YHOO) stock price, as Alibaba prepares for an initial public offering of shares; Yahoo’s is a major holder of the stock.
The early take on Amazon’s (AMZN) January announcement that it was considering an increase in the $79 annual fee for Amazon Prime was that it might lose some members, but its bottom line would be fattened. Suppose – in the wake of the actual announcement of a new $99 fee for the service, revealed Thursday – it works in the opposite way: spurring yet more sales growth but not doing much for actual profits as the online retailer continues to discount heavily.
That’s one possible takeaway from the lesson of Costco (COST), the membership warehouse merchant, and its occasional fee increases over the years, and some analysis added by William Blair & Co. analyst Mark Miller in the days leading up to the Amazon Prime price hike.
After a meeting with an Amazon investor relations official, Miller came away with these thoughts, among others:
Staples (SPLS) reports fourth-quarter results later this week – 39 cents vs. a year-ago 46 cents, excluding extraordinary items, is what’s expected – and value investors may sniff a bargain.
After all, Staples has a lovely dividend yield of 3.6%, it has often raised its payout, it’s trading at a forward PE ratio of just 11, and it has a big restructuring underway aimed at restarting sales growth, cutting costs, broadening the products its sells and better competing with the likes of Amazon (AMZN) and Wal-Mart (WMT).
Staples through the first three quarters, ended November 2, 2013, bought back 18.2 million of its shares for $269 million. Not a large gesture, to be sure, but the message seems to be: it’s cheap, so we’ll buy some, and maybe you should, too.
If you’re among those convinced that profits at Amazon (AMZN) will matter at some point, how and specifically where the company invests now will be especially crucial. While users have the joy of considering Amazon an Internet retailer, the company itself has the dreary tasks of running more than 80 million square feet of warehouse space, overseeing some 117,300 workers and constantly trying to reduce shipping times to satisfy consumer preferences the company helped create in the first place.
Even Amazon has limits to how much it can invest. Capital expenditures were $3.4 billion last year. We think the fastest way to sustained profits for the company, which has been famously unprofitable during long stretches in recent years, is to concentrate its resources as much as possible, particularly in North America where its business is already more mature and produces stronger margins.
The slide in Amazon (AMZN) stock was set off by a disappointing report on fourth-quarter sales and earnings per share, but also spooking investors was a suggestion by the online retailer’s executives that they will be raising the fee for Amazon Prime members from its current $79 to something between $99 and $119.
Won’t that scare off Prime members, and thus lead to even slower sales growth, some wondered? Perhaps. But Mark Miller, a retail analyst at William Blair in Chicago, looked at Costco’s (COST) experience in jacking up its membership fee in recent years, and found that the increases resulted in very little churn. Costco enjoys membership renewal rates above 80% and fee increases in 2000, 2006 and 2011 – 13%, 12%, 10%, respectively – didn’t change that, Miller reported.
A lot of retailers blamed weak consumer spending for their lousy holiday earnings reports, and at least some shareholders bought the excuse. But accepting that rationale now looks particularly naïve. Investors who haven’t already dumped the weaklings in their retail sector holdings might want to get right on that task. From the trend in the SPDR S&P Retail ETF (XRT), it looks like many investors have already started.
The whiners vs. the doers seems to be an early earnings season theme. Culling retail investments seems particularly wise following last week’s business news. Turns out that consumer spending has been healthy enough lately. It’s certain individual retailers that should worry investors.
Consider the report from the U.S. Commerce Department on Thursday. Consumer spending was up 3.3% in the fourth quarter, which was the best performance in three years. Moreover, the pace of spending seems to be picking up. December spending was up twice as much as analysts had predicted, and November’s numbers were revised upward.
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