- Amazon has been taking steps to drive more dollars to its bottomline.
- However, pricing competition in major operating segments will increase the pressure on Amazon revenue growth and profitability over the coming quarters.
- Amazon’s losses could increase drastically as it competes with cash rich and highly profitable competitors.
Amazon (AMZN), over the course of the last decade has spread its tentacles across the internet, from e-commerce to cloud solutions to hardware (Fire phones and Kindle) to software (Fire OS). However, Amazon's profitability has been a constant worry. These worries could get worse with increasing competition from WalMart (WMT) in e-commerce and Google (GOOGL), Microsoft (MSFT) and IBM (IBM) in the cloud service segment. The latest talk has hovered around the company’s potential entry into online travel with the launch of Amazon Travel.
In our recent coverage of Amazon travel, we had highlighted the bottomline potential of such a move and how it could significantly impact Amazon’s bottomline. Amazon’s profitability has been overshadowed by the firm’s constant focus on topline. However, recent revenue misses have seen investors look at Amazon’s earnings in a more serious way, with investors punishing the stock for earnings misses in recent quarters. As a result, the stock has lost close to 20% in the year to date as compared to 14% and 12% gains in NASDAQ and S&P 500, respectively.
The recent revenue misses and increasing pressure for earnings growth has seen the company take a few steps to boost profitability. The company raised Amazon prime membership fees, priced the Fire phone as a premium, things that were a first for Amazon. However, these moves have had minor impacts on Amazon’s bottomline, with Amazon’s losses increasing sharply in the last two quarters; Q2 2014 and Q3 2014. While the potential entry into online travel could help the company’s bleeding bottomline, increasing pricing pressures in its two major segments could be another cause of worry. Amazon’s topline growth and profitability will come under increased pressure as Amazon battles increased pricing pressures in its major revenue segments; e-commerce and cloud services.
WalMart matching Amazon prices this holiday season
E-commerce giant Wal-Mart Inc.recently issued a directive to match online prices of online stores. A reading of the directive shows that the retailer will match the prices only for items whose orders are fulfilled by the seller and not for third party sales. This means Wal-Mart will match Amazon’s price and offer the same in Wal-Mart stores, in case Amazon has a lower listing price for a product. This makes the giant retailer extremely competitive and raises Amazon’s worries for the holiday season. This could land a significant blow to Amazon’s holiday quarter topline growth (Q4).
Amazon web services under fire from Google and Microsoft
The other major segment where Amazon faces rising heat is its Amazon web services (AWS) business. The competition in this segment is mainly from the biggies Google and Microsoft. Google has been undercutting AWS on pricing, which has forced Amazon to lower prices for its web services. The direct result was seen in Q2 2014, when AWS revenues declined in spite of a 90% rise in usage. Another major concern to every investors will also be the rapid growth of Amazon cloud competitors Microsoft and IBM, eating into the market share of AWS. In conclusion, while Amazon attempts to drive its bottomline growth, increased pricing pressures in major operating segments will worry Amazon investors. Competing with cash rich and highly profitable competitors on pricing is never a wise idea. As a result, the losses could continue to increase and Amazon needs to find a solution quickly or else the decline in the stock could just get steeper.