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Paulo Santos, Think Finance (388 clicks)
Long/short equity, arbitrage, event-driven, research analyst
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As I've said, Amazon.com (AMZN) is an endless gusher in terms of developments, most of them negative. It never ceases to amaze how each day that passes seemingly there's another nugget coming out of this mother lode. At this point I almost feel overwhelmed.

Amazon.com's news that it would hit 50,000 temporary employees was what got my attention today, and prompted this article - hence the title. However, as the days go by the mother lode doesn't stop producing, so I'll go through other items as well.

I'll start with the nugget that gives meaning to the title.

Where are the robots?

Amazon.com today announced it expects to hire 50,000 temporary holiday workers. All fine and dandy, but there's a problem here. This number keeps increasing faster than sales. Although Amazon.com didn't disclose how many temporary workers it hired during the 2011 holiday season, we do have the number for the 2010 season: 15500.

During Q4 2010 Amazon.com saw revenues of $12.95 billion, and for Q4 2012 estimates point towards revenues of $22.84 billion. That's a 76% growth rate right there. Problem is, with temporary workers going from 15,500 to 50,000, that's a 222% growth rate. While a temporary worker during Q4 2010 would have handled $835k in revenues, during Q4 2012 that would already be down to almost half, at $457k.

So where are the robots? Where is the efficiency? As I've said in the past, the huge increase in SKUs introduces warehouse inefficiency - it becomes harder to service both the past SKUs and the new ones. There's a reason why other stores don't "carry everything," and that reason is not that they're not able to. It's that they don't want to because it's not profitable.

Buying Texas Instruments (TXN) mobile chip business

The main gist of this article was the comment on temporary hiring and the increased inefficiency it shows. However, since I'm here I'll also comment on other developments. One of them was the rumor yesterday that Amazon.com might acquire Texas Instruments' mobile chip arm. TI makes the OMAP chips used on the Kindle Fire series of tablets.

Now, first of all I must say I find this highly unlikely to happen, even if as a short I'd welcome it greatly. If it does happen, it has all the trappings of a deal which will bring great grief to Amazon.com. It would be both expensive, and able to burn through a lot of earnings. After all, TI is thinking of leaving that particular business because of the excess competition in it, the lack of margins. Now imagine Amazon.com having to invest there just to keep up with the fast-paced technical innovation of companies such as Apple, Samsung, Qualcomm (QCOM) or Nvidia (NVDA).

If Amazon.com goes ahead with this deal, it will be buying itself a quagmire, and also giving more ammo to something I'd said in the past: that it's spreading itself too thin, into too many business lines, going against much stronger opponents simultaneously. This is not going to end well for Amazon.com.

Google (GOOG) Product Ads

This is something I left out of a previous article on Amazon.com but cannot ignore. Google has developed and deployed a new type of ad: The product ad. What this ad will do, is it will expose specific products, pricing and maybe even images in response to search queries. These ads will take the consumer directly to the seller's website.

This is extremely dangerous for Amazon.com, since the most profitable part of Amazon.com is the third party selling of products, where Amazon.com functions as little more than a search engine, exposing the third party proposals and, if the consumer chooses to buy those products, taking a commission cut on the sale.

Google promises to be cheaper than Amazon.com for this function, since it won't take a cut on the sale - it will just make its money from clicks on the ads. Google might thus be a large threat both for Amazon.com and for Ebay (EBAY) in what is regarded as fixed price selling by third parties.

At this point, it's just a matter of seeing whether this kind of advertising will take off. If it does, Amazon.com might lose the last leg of its already unbalanced stool.

Conclusion

What this article shows is that even in the small details, like holiday hiring, Amazon.com continues to show decreased efficiency, which will tend to impact earnings negatively. There's precious few signs of the supposed Kiva efficiency revolution at this point.

Not only that, though, but Amazon.com continues to be exposed to other developments which can hardly be called positive, be them generated by its own management (if the Texas Instruments acquisition turns out to be true) or by competitors (the Google product ads initiative). This is not the kind of evolution you expect from a stock trading at 345 times earnings, with those earnings already consistently heading lower. At some point the stock will suffer incredible punishment.

Source: Where Are The Robots?