Amazon Has A Moat Without A Castle

| About:, Inc. (AMZN)
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Recurrently, when talking about (NASDAQ:AMZN), people talk about it having a "moat." The point they're trying to make, is to invoke Warren Buffett's notion of a business having a moat and thus being more desirable, because such business would be harder to assault.

So what is a moat?

A moat, as most know, is that trench surrounding a castle which makes it hard for invaders to penetrate its walls. So it's basically an obstacle protecting something.

Warren Buffett talked about the existence of a competitive moat when a company has something, some characteristic, which makes it hard for competitors to take away its high margins. That is, wherever high margins exist, people are attracted to them, and if no impossible-to-transpose barrier exists, then the entrance of new competitors drives those margins into the ground.

This thus leaves us with two questions. First, what kind of barriers does possess? Second, what are they protecting?

The barriers

When talking about's moat, articles invariably name's network of warehouses across the country as being this so-called moat. This is the first misconception. There is no barrier (other than time and money) to build a similar network of warehouses. Indeed,'s distribution centers aren't even's… they're leased.

Time and money is not a barrier, especially not in a world awash in liquidity. In fact for some the ability to deploy enough capital in a given business, more than driving them away, attracts them. If we were talking about iron ore or crude, businesses that require tremendous amounts of money to get off the ground, nobody in his right mind would say that the investment was a barrier-to-entry. It simply isn't.

What makes for a barrier is something which other companies cannot be certain to emulate even if they spend a lot of money. A warehouse, you know you get the warehouse up and running if you stick $20 million, $30 million, $50 million into it. There is no uncertainty.

So when is there a moat? When no matter how much money is put into something, the outcome is uncertain. When legal barriers don't let you compete. When physical barriers don't let you compete. For instance, when Pfizer started selling Viagra, some other competitor could not come in and steal the business no matter how profitable it was. He couldn't sell Sildenafil because of a legal barrier (patent protection), and doing R&D to come up with another active chemical having the same effect was not guaranteed, either.

So does have any of these types of barriers? The warehouses aren't one. But there might be some kind of barrier in two instances:

  • The Kindle franchise. Once people have the devices they're locked into buying the ebooks from So this is something of a barrier, though it's related just to a small part of's business (ebooks);
  • And also has strong name recognition - a brand. This brand carries an image of "great deals," and many people won't question such image and will buy first and foremost from even if better deals are available elsewhere. This is already a bit of a moat, though it can be negated over time because it's based on selling stuff at low prices, and that kind of image only stands if the prices are consistently better than average. That is, keeping this image forces to sell consistently cheap.

Another kind of moat

There is another kind of barrier which can also exist: being the lowest cost provider. Here it's important to understand something: it's not about having the lowest prices, it's about having the lowest costs. Wal-Mart (NYSE:WMT) ended up winning in the physical retail space through having lower costs and lower pricing due to them. Costco (NASDAQ:COST) is similar - it has extraordinarily low pricing, brought about by extraordinary low costs. Looking at these companies' P&L bears this out. Their costs are demonstrably low.'s aren't.'s costs below gross margin are higher than either Wal-Mart's or Costco's. might even be a price leader, but is not a cost leader. So it has no moat like having low costs. When competes on price, it does so by sacrificing profits. When Wal-Mart of Costco compete on price, they don't sacrifice profits and never did. They compete on price because they have cost superiority.

So here has no moat either.

The castle

This brings us to the other question. What is the moat protecting? A moat is supposed to protect high margins, rendering them sustainable. This instantly poses a problem for doesn't have high margins. Indeed, hardly has margins at all. had losses for 2012, and in the best of days it carries an operating margin of less than 1.5% and a ROE of less than 10%.

In short, at this point hardly has anything to protect. Even if we believed there was a moat, which is debatable, there would be nothing for it to protect.


When talking about a moat, it's usual for people to point towards's infrastructure. As I've shown, having to invest money in easy-to-replicate capital expenses is no kind of moat. Other than that, can have small moats in its Kindle franchise and in its name recognition. But the question remains, a moat only makes sense when there's something to defend. When talking companies, that something is high margins, high profits. has neither. I wouldn't be far from the truth if I said that at best, has a moat without a castle.

At this point, is far from being a business worth paying $115 billion for the market capitalization it trades at.

Disclosure: I am short AMZN. 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.