At a speech given at BookExpo America's annual convention, best-selling author James Patterson remarked Amazon (NASDAQ:AMZN) "wants to control book buying, book selling and even book publishing…Sounds like the beginning of a monopoly."
It's important to note that Amazon is currently in the midst of a feud with Mr. Patterson's publisher, Hatchette Book Group, over pricing. In a strikingly retaliatory way, Amazon has deliberately slowed the release and delivery of Hachette's authors, to the dismay of many customers. Ironically, one of the book's affected by Amazon's intentional shipping delays is a book about Amazon founder, Jeff Bezos, titled The Everything Store.
Last week, Barron's published a bullish piece about Barnes and Noble (NYSE:BKS), the last remaining national brick and mortar book store. Barron's claimed the shares could double as a sum of the parts valuation suggests a much higher value than where the company currently stands. Allegedly, Amazon has laid waste to the smaller brick and mortar book stores nationally, and has depressed the valuations of all sorts of other retailers nationwide. In the process, Amazon has earned itself a lofty valuation that is not easily understood. Mr. Market has granted Amazon a valuation of roughly $143B, which is roughly twice last year's revenues. Amazon does not generate positive EPS, so there is no dividend, and apparently Mr. Market's valuation is banking on continued top line growth, as Amazon investors don't seem to care about the bottom line.
Prelude: Brick and Mortar is Not Dead
At some point in 2012, I saw shares of Best Buy (NYSE:BBY) trade at around $11 a share, down on disappointing results and outlook, a fraction of what it once was. I decided to buy some shares in my personal account, because I couldn't remember the last time I bought an electronic good without needing some guidance from a salesman, or a place to actually feel the product. Without doing any real analysis, I just assumed that Best Buy would have to survive, because there had to be more people out there like me. That trade played out quite nicely, and I sold the shares north of $20. Since then, Best Buy has introduced a price match guarantee to customers that has taken Amazon head on.
Brick and Mortar retailers are making a valiant stand against the E-based competitors, particularly Amazon . Just a few years ago, B&M's like Office Depot (NYSE:ODP), Rite Aid (NYSE:RAD), and Best Buy were being written off as dead. Some of the B&M retailers have been top performers in the broad market, such as Dick's Sporting Goods (NYSE:DKS) and Michael Kors (NYSE:KORS). A friendly and inviting store with reliable, informed, and reasonably well paid salespeople should not be a crutch for a successful retail operation. Last week, Nordstrom (NYSE:JWN) topped sales estimates and saw its stock jump nearly 15%.
Amazon's Impact on Small Business, The Environment, and U.S. Government Tax Receipts
Small businesses are the engine of economic growth, employing over 90 million people in the U.S.
In 1992, there were about 4,000 independent bookstores, as of today only about 1,000 remain; and that's only the book business. There is not a great deal of research done on this matter, but is abundantly clear that Amazon specializes in dismantling small ma and pa enterprises, and replaces them with the regional warehouse and main frame.
Working for Amazon is apparently not a great experience either. In late 2013, Amazon announced plans to hire 7,000 new workers, 5,000 of which are warehouse workers. Amazon has approximately 20,000 warehouse workers, and they earn hourly wages of approximately $12, below the national average. Wal-Mart (NYSE:WMT), yet another company not particularly well known for paying high wages to its employees, averaged $19 per hour for warehouse employees. In comparison, the average warehouse worker at WMT earns about $40,000 annually, while the same person at AMZN earns close to $24,000 per annum, only about $1,000 above the federal poverty line for a family of four.
In April, German workers at Amazon went on all day strike to protest low wages.
Because of the excess packaging (the box, Styrofoam, etc.), a typical retail good is far more environmentally impactful (in a negative way) when purchased from Amazon. And if you can imagine how many packages Amazon sends out (Cyber Monday of last year, Amazon processed 426 items per second) it's a deeply taxing amount of cardboard and packaging.
Unlike brick and mortar retailers, Amazon gets away with not having to charge sales tax in many instances. This is a tremendous unfair advantage that likely won't be around forever. There has been talk in Congress about curtailing this loophole, but it's not likely to change anytime soon. However, as Amazon begins to build a taxable presence in multiple states outside of Washington, this advantage will diminish in value. Amazon, however, recognizes the risk and characterizes it in their annual report.
We Do Not Collect Sales or Consumption Taxes in Some Jurisdictions
U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of states have considered or adopted laws that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. We support a Federal law that would require sales tax collection under a nationwide system. More than half of our revenue is already earned in jurisdictions where we collect sales tax or its equivalent. A successful assertion by one or more states or foreign countries requiring us to collect taxes where we do not do so could result in substantial tax liabilities, including for past sales, as well as penalties and interest.
Risks to Amazon's Business The Market Does Not Seem To Understand, Much Less Appreciate
Google is making a Foray into Local Delivery that will undermine Amazon's Ambitions
Unlike Amazon, however, Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) local delivery platform does not aim to annihilate small business and established retailers with its service. Rather, they partner with them. This is a recipe for Google's success in the local delivery market, and a massive headwind for Amazon.
E-Book Market is Not a Profitable Business, Long Term
Hardware has, and always will be, a commodity. Amazon loses money on the hardware it produces, and hopes to recoup its revenue in the E-book market. The trouble however, is that at some point this business will be commoditized. E-book rights will trade on an open market, and hardware will be produced cheaply oversees by competitors.
Cloud Computing Business is Also Commoditized
Amazon sells cloud space to business because they only use max capacity at very busy shopping intervals like Black Friday and Cyber Monday. This business (to some degree it already is) will continue to be commoditized to the point where it has little economic value.
Amazon Will Not Succeed In the Ultra-Low Margin B2B Market
Amazon rolled out a product called AmazonSupply that aims to compete in the wholesale and distribution market. The business was optimistically profiled in a recent article by Forbes.
The B2B space is characterized by super low margins (under 2%), lots of volume, and legacy relationships that keep retailers ticking.
Also, not to mention, these B2B customers are Amazon's sworn enemies, large retailers who have seen their market values take big hits because of Amazon's disruptive nature.
Amazon's foray into B2B is exactly the type of endeavor that has ballooned its stock price due to overly optimistic journalists and investors, who are enamored by nonsensical attempts to collect market share.
All the Above Factors, In Addition To Its Aversion to Profits, Make Amazon Uninvestable
Thoughtful investors, in addition to doing their homework and diligent investors, should be mindful of companies that are harmful to their localities and communities.
In this piece I have outlined why I believe AMZN is a poor investment, from a classical securities analysis approach. That's an easy case to make because, after all the company hasn't been profitable in a while.
I would take my argument one step further and recommend AMZN as a highly attractive short opportunity. It has certainly benefited from the 5 year bull run, and bubble like growth within the tech sector. As short interest is roughly 6M of 400M shares outstanding, a short squeeze is a distinct possibility.
Amazon is a company that is massively overvalued, yet massively unprofitable. Should a bubble burst in the Nasdaq 100, as some investors such as the legendary David Einhorn has alluded to, I would expect AMZN to lose approximately 50% or more of its current market value.
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.