Why Big Retailers Fear Amazon.com Inc. (AMZN) While Investors Love The Stock

  • Amazon has two strong profitable segments, AWS and, now, North American retail.
  • Big retailers are still years away from reaching the online scale that Amazon has.
  • Amazon continues to outpace them in growth as well as profitability, which will drive Amazon stock higher.

Amazon.com, Inc. (NASDAQ:AMZN) has shaken up the retail industry around the world. It has disrupted the market so much that no retailer can afford to stay alive without starting their own e-commerce operations. Retail is an extremely competitive and highly mature industry. Proof of that lies in the fact that despite its size, Amazon did not suddenly create new customers or a new market, they’ve just been taking customers from other businesses, and so far they have been extremely successful at it.

Where Does Amazon’s Profitability Stand?

As investors, we all want to know how much a company we invest in will grow, and how much will filter down to its bottom line. Amazon has steadily expanded its international operations but, so far, the company’s overseas operations aren't that profitable. And it will continue to remain that way until Amazon reaches critical size and scale in individual overseas markets. Retailers operate on wafer-thin margins, and they make up for it by moving a huge volume of products. Size, therefore, is extremely crucial for any large retailer's profitability. The more the users, the healthier the bottom line.

Of Amazon’s three divisions, Amazon AWS and North American retail operations have reached that size, where they are able to show consistent bottom line results. There is no doubt about AWS' prospects, and the way the cloud market is growing, Amazon will keep moving North in this highly profitable segment.

Also read: AWS Will Be A Key Value Driver For Amazon.com Inc. (AMZN) Stock

What’s the Growth Potential for Retail in the United States?

As for North American retail operations, this is their core target market because it’s worth nearly $5 trillion, according to e-Marketer. By 2020 that’s expected to near $6 trillion. Of that total retail volume, the top five companies - Wal-Mart Stores, Inc. (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST), Amazon, Target Corporation (NYSE:TGT) and Kroger Co. (NYSE:KR) - account for nearly $1 trillion, and the fight to get from there to the next level will necessarily involve all five.

But of these five companies, Amazon seems to be moving forward the fastest. Amazon's spectacular growth during the 2006-2016 period was fueled by the company’s meteoric rise in its home market. Sales in US and Canada grew from approximately $6 billion in 2006 to $63.71 billion in 2015. Revenue growth for the last three years is still at the high double-digit pace, a clear indication that the company’s growth rate hasn’t slowed down despite the top line getting bigger and bigger each year.

Amazon quarterly growth chart

Amazon has been taking customers from all other competitors in the market and, to make matter worse for its rivals, their operating margin in the home market has been steadily expanding over the last two years.


Why Big Box Retailers Should Fear Amazon

One of Amazon’s biggest headaches has been the high cost of shipping, which will always remain high due to last-mile shipping that comes with any B2C e-commerce business. The increasing margin numbers, however, show that the company has already moved into a position where it is able to cover those costs and still make money. The further the margin remains at these levels, Amazon is bound to push ever harder to expand its top line by reducing product costs, adding more services for its Prime members and adding more products to its collection. Ideally, it will be a mix of all three elements that keeps pushing Amazon’s top line and margins higher and higher.

As far as rivals are concerned Amazon is a cannibalistic monster that craves its own kind. As Amazon continues to expand within the North American market, other retailers will continue to see market erosion. It’s not that they don’t have the muscle to push their own digital agendas, but most of them started too late when Amazon was already selling in billions every year. To now get to Amazon’s scale is going to take them years. They do have the advantage of strategically positioned stores that can double up as e-comm warehouses, but they’ll never be pioneers in the world of e-commerce. That spot’s already taken.

Also read: Why Its Too Risky To Short Amazon.com Inc. Stock (AMZN)

For Amazon.com stock investors, that’s great news because North America still holds massive potential for growth. Amazon is now trading at 3.28 times sales against Wal-Mart’s 0.46, but with plenty of growth opportunities at home as well as in international markets, Amazon stock is definitely worth the investment risk.

Amazon will take a few more years to start posting profits in few of the international markets, but profitable growth in North America retail operations and AWS will allow the company to keep expanding at a good clip.

Shudeep Chandrasekhar Shudeep Chandrasekhar   on Amigobulls :
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