I mentioned Amazon (AMZN) as being one of Netflix’s biggest competitors. Well, Amazon happens to be everyone’s biggest competitor. If we are to play on romantic analogies, Amazon.com is the young, exotic femme fatal competing against frumpy old maids Walmart (WMT), Target (TGT), Barnes & Noble (BKS) and Best Buy (BBY), among others, for the attention of both shoppers and investors.
Amazon’s evolution as a company has been impressive. It started out as an online bookstore and has evolved into one of the dominant retailers in virtually every product category under the sun.
Skeptics and bears have long called Amazon the “river of no returns” for the company’s focus on sales growth and market share over profitability. Yet bulls have essentially taken the view that the profits will eventually come — when Amazon has crushed its competitors and forced them all into bankruptcy — and it belatedly raises its profits.
AMZN stock trades for a ridiculous 612 times trailing earnings and 84 times expected forward earnings. And this for a company with a return on equity of 3.1% and profit margins of just 0.37%. In contrast, frumpy old Walmart sports a return on equity of 22.53% and profit margins of 3.62%.
Amazon might have a sexier story behind it, but at its heart, it faces the same competitive forces that Walmart and the rest do. Mass-market retail is a cut-throat business with slim margins. There is always someone out there ready and willing to undercut you. And if you invent a better, more efficient system for controlling costs, you can bet your competitors will be copying it in no time.
Amazon’s share price collapsed in late January after a bad earnings report, falling by more than 14%. Yet the correction only took the stock back to November levels. At some point, investors will take a hard look at Amazon’s valuation, and a real heart-breaking correction will follow.