This article's objective is to answer Arne Alsin's "Is Amazon A $500 Stock?". The reason I am replying to that article is that I believe several of the facts contained in the article are simply wrong.
First, Amazon.com is not the e-commerce leader today, never mind in five years
One reason given to like Amazon.com, is the fact that it's the e-commerce leader. While Amazon.com leads the market in the U.S., worldwide it doesn't. GMV is mentioned, stating that Amazon.com might hit $180 billion in GMV in 2014.
The problem is that Alibaba was already at $170 billion GMV back in 2012. So Alibaba is larger today, so Amazon.com is not the leader. And Alibaba is growing faster, so Amazon.com won't be the leader in the future, either. Indeed, as Alibaba enters the U.S. markets, Amazon.com will have a problem because it's much cheaper to transact in Alibaba's markets than in Amazon.com. Many Amazon.com 3P sellers actually supply themselves in Alibaba.
Second, Amazon.com does not have a markup of 12.5%, the markup is higher
The fact that Amazon.com has a very low 12.5% markup is given as a reason bricks & mortar companies can't compete. This is false. Amazon.com's markup is higher. While calculating the product margin from Amazon.com's P&L seems to give us a 12.1% gross margin, this includes 10.7% in shipping costs, so the true markup is 22.8%.
Here's the calculation for the most recent quarter:
Not only is Amazon.com's markup much higher than stated by Arne, but Amazon.com is also not competitive with Wal-Mart or Costco below the gross margin line. Amazon.com has higher costs. So the only way for Amazon.com to compete on price is to destroy margins, like it's doing.
Third, investment does not offset earnings
Amazon.com is indicated to have no profits because it's investing. Amazon.com invests in AWS infrastructure and warehouses, but those get used immediately, and don't get expensed fully. They just get depreciated as used. The warehouses aren't even in Amazon.com's balance sheet, they're leased. Amazon.com just pays the rent.
Plus, the "we are investing" excuse for low profits has been with Amazon.com since 2010, 3 years ago. This makes it even more unrealistic.
Plus, when Wal-Mart was the size Amazon.com is today, it was growing faster and investing the same as Amazon.com invests today, yet it never had a hiccup in its profits. It didn't have an hiccup because of the way investments are accounted for, and anyone with an accounting background should know this. The investment excuse is false. It could only have minor earnings impact and it wouldn't last 3 years anyway.
Fourth, there is a cost to 3P sales
It is stated that Amazon.com could drop $10 billion to the bottom line from 3P sales, since those commissions have no costs. This is false. There are fulfillment, customer service, returns, marketing, technology and administrative costs associated with those sales.
Indeed, you don't even need to take my word for it. I can quote directly from Amazon.com's 10-Q:
Additionally, because payment processing and fulfillment costs associated with seller transactions are based on the gross purchase price of underlying transactions, and payment processing and related transaction and fulfillment costs are higher as a percentage of sales versus our retail sales, sales by our sellers have higher fulfillment costs as a percent of net sales.
Many of the arguments used in the article are demonstrably false. I documented all that's wrong and anyone can confirm my proof at the respective sources.
Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.