It's long been known that Amazon.com (AMZN) is not the most transparent of companies. This keeps people guessing. Guessing about how many Prime memberships there are. Guessing how many Kindles were sold. Guessing what the impact of the Kiva robots might be on Amazon.com's costs.
But generally, people only seem to try to guess positive things. When there is data pointing to negative effects, no guessing takes place. For instance, no guessing takes place regarding the impact of the ebook accounting change on Amazon.com's reported revenues. The artificial revenues are simply celebrated.
This is sometimes taken to extremes. Selling stuff is Amazon.com's main business, and shipping the stuff that's sold is one of the main costs of that business. So when UPS and FedEx increase prices for shipping, it's quite amazing that no analyst turns around and tries to estimate how much of an impact that would have on Amazon.com. After all, it's a dead certainty that Amazon.com will be paying more for its shipping. Since no one rose to the plate and estimated this, I thought I might as well do it myself even though I am trying to stay away from the Amazon.com bubble. So here it goes.
Shipping cost impact
Amazon.com pays dearly to ship all the stuff it sells. It's one of the main reasons why mail-order retailing might not be cost competitive with bricks & mortar for high-volume items. Amazon.com's shipping costs come to 10.5% of its product sales over the last twelve months to September 2013, or $6.09 billion.
Now, UPS (UPS) and FedEx (FDX) increased prices by 4.9% for 2014 (and these are average prices, the increases seem to be larger for the small packages Amazon.com said constitute 86% of what it ship). While Amazon.com is sure not to pay the same commercial rates as an individual, there's no reason to think that the discounts will be getting larger. This means that even if Amazon.com pays less, it will still get hit with the 4.9% increase. Amazon.com also uses USPS, but USPS is also increasing prices - in some cases more than UPS and FedEx, though not as "cleanly". For simplicity, I will consider a 4.9% increase across the board (UPS, FDX and USPS).
This means that on the same revenue base, gross shipping costs would increase 4.9%, 4.9% of $6.09 billion would be $298.4 million. If we consider an increase in product sales of 18% for 2014, then the cost increase would be $340.2 million.
And how much is $298-$340 million? As a measure of comparison we can use the consensus earnings estimate for 2013. This consensus is for Amazon.com to earn $0.73 per share on around 465 million shares. So the consensus is for Amazon.com to earn around $339.5 million. While the $298-$340 million are pre-tax and the consensus earnings is after tax, it's still clear that it's an enormous amount, nearly able to wipe out the entirety of Amazon.com's small earnings.
Yet, such a massive number is ignored and not estimated at all by most analysts, in spite of the obviousness and materiality. It boggles the mind. Sure, Amazon.com might be able to recoup some of the increase from its customers by increasing shipping charges itself, but why is no one mentioning the potential impact?
In other news
Amazon.com put out the customary vague press release on how Kindle sales were the best ever in the Thanksgiving weekend. Leaving aside the fact that in 2012 Amazon.com touted the doubling of Kindle sales, and in 2012 the quadrupling over the same timeframe, which makes it appear that in 2013 these sales were just marginally higher, there is something else which is missing: Amazon.com made much heavier discounts in 2013 than it applied in 2012. In 2013 Amazon.com discounted the Kindle Fire HDX by $50 and the Kindle Fire HD 16Gb by $50 as well. In 2012 it just discounted the original Kindle Fire by $30.
In short, Amazon.com had to apply much larger discounts to exceed 2013 sales marginally in one weekend. And outside that weekend, everything continues to point towards Amazon.com actually selling fewer Kindle Fires in 2013 than it sold in 2012. But is this found anywhere (but Digitimes) or visibly estimated by anyone? Again, it boggles the mind.
While every effort is made to estimate some far out positive for Amazon.com, none is applied to very down-to-earth obvious cost increases. This simply makes no sense. Most of Amazon.com's business still consists in selling and shipping stuff. If every shipper increases prices significantly, it only beckons someone ought to estimate the impact. But no one does.
Anyway, I estimated the impact myself and put it at $298-$340 million, if we use 2013 or 2014 as the sales base. This number is very relevant as it's about the same size as Amazon.com's entire earnings base for 2013. Of course, Amazon.com might be able to recoup some of it for its own customers through shipping charge increases including the recent increase of the minimum threshold to get free shipping.
Amazon.com is a massive bubble, the 16th most valuable company in the market in spite of its low profits. If Amazon.com were to turn wildly profitable, then it might aspire to be the market capitalization it already is. Amazon.com trades for 526 times its 2013 earnings estimate. It trades for 151 times its highest-ever earnings, a level it's unlikely to reach in the near future given the changing mix in its sales.
Additional disclosure: I have an options position which stands to gain from AMZN's drop.