Seeking Alpha
Long/short equity, tech, research analyst, eCommerce
Profile| Send Message|
( followers)

Fellow SA commentator Paulo Santos has pointed out some of the various fallacies that Amazon (NASDAQ:AMZN) bulls believe in, the most notable one being how investment has supposedly suppressed Amazon's profitability. But there are also some fallacies that Amazon bears like to believe in too. Here are just four:

Other shopping websites are only 1 click away: The corollary to this is that price is the only thing that matters to online shoppers. Bunk!

There's far more to buying online than price, just as there is to buying in a physical store. Just as stores differ in the customer service, interior environment, returns policy etc, so do online stores. Amazon is the Apple (NASDAQ:AAPL) store of the web: its reviews and recommendation engine are equivalent to Apple's Genius', its product search is equivalent to Apple's simple and Spartan store layout. Its one click payment is the equivalent of having not to queue - so in fact, it is actually better than how Apple does things. The only difference between the two is that the entirety of Amazon's goods flows through Amazon's website rather than just the small portion of Apple's goods that flows through Apple's stores.

Moreover, despite physical stores being in theory stickier than a website - you have to walk or drive to visit another store rather than just clicking on another website - it is the physical store chains that have experienced far greater vicissitudes of fortune than Amazon or eBay (NASDAQ:EBAY) have over the last two decades. Many high flying chains as well as storied retailers have either fallen by the wayside or find themselves in straitened circumstances: Circuit City, Borders, Sears (NASDAQ:SHLD), Barnes & Noble (NYSE:BKS), and Best Buy (NYSE:BBY) to name just a few.

I therefore believe it's well within the power of Amazon to raise its prices by a few percentage points when it feels it needs to without any significant market share loss or even any substantial decline in growth rates.

Amazon's declining revenue per employee.

In 1997, Amazon's first year of trading, its revenue per employee was $241,000. Over time, as Amazon expanded from an online bookseller to a general e-tailer, the value of goods per employee rose until peaking at over four times that amount in 2010. This trend was driven by higher value goods, such as electronics, taking up a larger share of sales.

2012

$690,000

2011

$855,000

2010

$1,014,000

2009

$1,008,000

2008

$925,000

2007

$872,000

2006

$770,000

2005

$707,000

2004

$769,000

2003

$674,000

2002

$524,000

2001

$400,000

2000

$306,000

1999

$215,000

1998

$290,000

1997

$241,000

Since 2010 though, it looks as if Amazon's productivity has dropped severely. Revenue per employee is back down to 2003 levels. What has happened?

Over the last several years, Amazon has sold increasingly more goods through its third party marketplace (3P). In fact, this year it's likely (unfortunately Amazon doesn't provide figures) that more than half of Amazon's gross merchandise value, or GMV, is via 3P.

In 2012, 3P would have been a smaller share, perhaps about a 40% of total GMV. Since revenue in 2012 was $60 billion, total GMV must have been $100 billion. At the end of 2012, Amazon had 89,000 employees, so total GMV per employee would have been around the $1.1 million level. This exceeds any of the previous year totals.

Amazon and other ecommerce sites have prospered only because there was no online sales tax, an advantage which is now going away.

This ignores the fact that in the U.K tax has been applied to both offline and online purchases since 2003. Yet online sales in Britain are a much higher percentage of retail sales - 10%, than in the U.S, where it's only 5%. That means Amazon could grow at 25% per year for the next three years and still only be at the level that Britain is now.

Actually, the situation in the United States will still be better for Amazon than it is in Europe, because even if the Internet Market Fairness Act passes, only merchants with sales above $1 million dollars are obliged to collect taxes from their out of state customers. So it won't harm the huge number of small sellers that use Amazon's third party marketplace.

Amazon's ecommerce future really does lie with its Marketplace sellers, which neatly brings me onto my final fallacy.

Sellers on Amazon's marketplace won't be able to compete with other retailers, including Amazon itself if they have to pay a commission to Amazon.

This last fallacy is quite subtle: how on earth can a seller on Amazon (or eBay) make a decent margin if they effectively have to include Amazon or eBay's margins too? So for instance, eBay makes 4.2 percent margin from its gross merchandise value, Amazon must make a similar amount on its 3P marketplace. If the small seller's margin is added on top of that, how can they compete with Best Buy, (3% margins) say? The answer is that small sellers in aggregate don't earn positive margins: rather they are content to work for less pay than they could get working as an employee at Best Buy or perhaps Amazon itself, in exchange for being their own boss, setting their own hours plus having a shot at the big time.

Conclusion

Amazon is perhaps the most fiercely debated stock on SA, and rightly so. Its meteoric stock price combined with its plummeting profits demands explanations and theories. Combine that with a paucity of information to go on, and it's unsurprising that various myths and fallacies have developed around it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Source: 4 Dangerous Amazon Fallacies