Selling things online appears to be a great idea for a business. In fact, it's a fun model: we are all so excited about the many opportunities for new businesses to thrive online. In the case of some major Internet companies, we have bid up the stocks to very high levels. But history tells us that we have done so at our own peril.
Yesterday I wrote that Amazon.com Inc. (NASDAQ:AMZN) is overspending on growth and is thus overpriced, and concluded that the market has lost its collective sense once more. I raised numerous questions and received some thoughtful support in the comments. Since then, I have asked myself one more inescapable question which I pose today: What choice do they have?
From the inception of Amazon.com, Jeff Bezos has argued that, in this particular business, "first mover status" is critical to its success. The market supported this thesis and we were off to the races. Amazon has been on a spending spree, growing its sales quarter after quarter. But Amazon is trapped. It must continue to grow at all costs. It has reported top line sales growth again in the latest quarter -- but very disappointing profits.
The truth is Amazon is just like a great big supermarket. That is what it wanted to be, the online supermarket to the world. I think Bezos has achieved his goal but there is a HUGE problem here: supermarkets have very low profit margins!
Amazon is trapped. It will always have low margins, that is the nature of the beast, that is the nature of supermarkets, that is what it is.
It is like a giant balloon that must constantly be filled with hot air or it will come down to earth. Who better to keep blowing hot air then Jeff Bezos? He understands exactly his situation. That is why he is now dabbling with spaceships. He needs a new vehicle. Or maybe he just feels the need to get out of town. Way out of town.
One more thing to note: BloggingStocks actually categorizes Amazon appropriately under the heading of "retail", not "Internet" companies. When the market accounts for this reality the stock price will come down. The market can be stubborn in the short run but not in the long run. And in the long run, the stock price is likely to get slammed.
Disclosure: I hold no position in Amazon.com, never have, and probably never will.
Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an architecture & planning firm.
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Reader Comments (Page 1 of 1)
11-02-2006 @ 10:35PM
AD said...
What are your thoughts on Amazon's third party merchant business which has very high margins, is growing fast and constitutes 30% of their profits?
11-02-2006 @ 10:57PM
Sheldon L said...
AD
1) When and if third party merchant sites start contibuting significantly to AMZN's bottom line profits then those profits matter. For now they are not significant and in no way can help to justify current valuations.
2) If you are hopeful that they will have a material affect you are speculating wildly. WHY DO THIS? Can't you find a hundred better investments. Almost anything is better. Myself, I would buy Ford or GM before I buy AMZN at it's sky high price.
3) Amazon currently is using a scatter gun approach to growth. It has been reported that they are making high margins and growing the jewelery business, but at the same time they are adding groceries...very low margin...back to being a supermarket.