Is Amazon's E-Commerce Edge Evaporating?

| About:, Inc. (AMZN) (NASDAQ:AMZN) has continued to charge ahead in 2013 on the booming potential of its cloud division, Amazon Web Services [AWS]. Bulls have always been quick to point out the massive competitive moat Amazon has been investing in (mostly big data centers) to build a long term advantage in the cloud industry. AWS has been on fire for the past 2-3 years, and is even projected to hit $3.8B in revenue in 2013.

Analysts have already pegged the value of the young AWS between $19-$30B, implying a hefty price/sales multiple and implications of massive growth. Even though $3.8B sounds like a lot to add to Amazon's topline, it's really not. Amazon is projected to bring in $75.6B in 2013, meaning AWS will represent just 5% of Amazon's revenue this year.

Where does all the rest come from? Mainly Amazon's bread and butter e-commerce business. But recently, several prominent players have announced very similar/competing product distribution models.


Just this month it was reported that Google (NASDAQ:GOOG) was testing same day delivery service for its online shopping service in San Francisco. The specific service Google is testing is called Google Shopping Express, something very similar to Amazon Prime.

Amazon Prime was a huge driver of Amazon's growth, and gave the company a significant edge because of shipping practices that favored consumers. Amazon's model of selling this offer at cost to beat out competition was a great way to gain initial traction for its website. But now Google is here, and its not alone.


eBay (NASDAQ:EBAY) was reportedly testing out a same day delivery service with select retailers such as Target (NYSE:TGT) and Best Buy (NYSE:BBY) this summer. Those rumors have morphed into eBay Now, a service in San Francisco and New York that offers same day delivery of certain products.


Wal-Mart (NYSE:WMT) is another giant trying to nudge its way into same day delivery. Wal-Mart To Go is a service available in San Francisco (and several surrounding locations) that offers same day delivery for some of Wal-Mart's more popular items.


Not only are small companies being snapped up by Amazon's competition (see Google's acquisition of BufferBox), but some start-ups are competing with Amazon on their own as well.

The UK, China and India all have their own, newer, versions of same day delivery e-commerce. In the UK, London is home to 2 different startups, Shutl and Net-A-Porter, that offer same day deliver. In India Flipkart connects consumers with carriers to quickly deliver packages. In China, a startup called Yoox has established a partnership with Fedex (NYSE:FDX) to offer same day delivery as well.


Amazon's sky high valuation is no secret. Short sellers have been calling the retail giant's demise with severe inaccuracy for years now, only to get proven wrong quarter after quarter. But things are a little different now. Amazon's wiggle room has dwindled close to 0. Profits were actually negative in 2012, and revenue growth will slow below 30% for the first time in 2013. On a forward basis Amazon's P/E is over 100, and earnings estimates have declined dramatically in the past 6 months.

Amazon Prime (2 day shipping) was launched in 2005 and gave Amazon a huge lead in e-commerce. Solving the crucial consumer pain of shipping delays/cost was a major breakthrough, to Amazon's credit. Unfortunately, that advantage has quickly deteriorated, Google, eBay, Wal-Mart and many others are beginning to offer the same shipping services.

Because Amazon is priced for perfection, any further downside to margins could severely pressure shares. Analysts are already predicting a huge bounce back to profitability this year and a continuation of that in 2014. I understand AWS is growing fast, but at just 5% of Amazon's revenue, how much can it really help in the next 2 years?

Amazon is still counting on growth from its online retail business, but its edge is quickly evaporating. If all of the competition mentioned above were to successfully rollout competing shipping/product infrastructure, then Amazon shares could be very overpriced at $260.

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.

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