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Amazon's Growth Is Slowing

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The purpose of this article is to explain some of the trends seen in the last Amazon (NASDAQ:AMZN) earnings release in relation to individual consumer behavior - namely me and my family. I consider myself an early adapter of things that save money (I'm a Scotsman). I expect other consumers will soon come to the same realizations. This will have a significant impact in slowing Amazon's growth.

I use a Peter Lynch approach when evaluating a stock. Peter Lynch, who for those younger was a mutual fund manager in the '70s and '80s who ran the premier fund at the time, Fidelity Magellan. He would pay attention to the shopping that he and his family did to find companies to evaluate for his fund. I like to do the same although I have more of an inclination to go short than Lynch did. See my previous write up on CMG back when it was above 400.

Applying this approach to Amazon, I relate my recent experience with online purchases against Amazon's reports of growth.

"… lowest December growth rate in our 17 years as a bookseller, up just 5%." The quote is from the January 29, 2013 earnings announcement.

This slowing is understandable, I can't remember the last time I bought a book directly from Amazon. The last new book I bought was listed at $13.60 on Amazon; add to this tax about 10%, $1.36 and shipping at $3.99 for a total of $18.95. (I realize I could have joined Prime or bought something I didn't need and bring my total over $25.00 for free shipping). I bought the book, also new, through Abe Books for $13.90 all in, including $3.99 shipping.

Amazon third-party (3P) sales up 36 to 39% year/year. I couldn't find if itspecifies units or dollar growth.

I have also bought used books, through Abe Books, and (the 3P used bookseller associated with Amazon). My last purchase through was two books, one for one cent and one for two cents. Add $3.99 shipping to each for final cost. I believe Amazon gets a percentage of the selling price, but not the shipping. Also, most third-party sellers through Amazon also have a direct site where you can sometimes save a little more than buying through Amazon. This may add to units, but doesn't help dollar sales.

Our most recent significant purchase was to replace our Miele vacuum. We went to a local store first, when it was rigid on price we went on line. It appears that Miele controls selling price very tightly and we were not able to find a better price. The unit was nominally $400.00. Through Amazon it was $400.00 plus $40.00 tax and free shipping. Through another online vendor it was $400.00 all in. The service was excellent too. While Amazon has superior customer service it has raised the bar for all retailers. I have had only excellent experiences with other online purchases.

What does this mean to an investor? The so-called Amazon "moat" doesn't exist. It was composed of excellent customer service and low prices. These are no longer advantages at Amazon. And, when you look at price matching by major brick and mortar competitors things don't look too bright. Too, I view the fulfillment centers as a defensive move, not an offensive move. And, Amazon is still about 3980 locations behind Wal-Mart (NYSE:WMT).

The announced purpose of the fulfillment centers is to get orders to customers faster and reduce shipping costs. If I want something faster I just go to the store and get it the same day. (Don't have to wait for second-day Prime or any extra cost.) Amazon tried to lower shipping costs (and perhaps delivery security) by delivering to mini marts and office supply stores. I haven't heard much of this recently. My guess is it didn't work because as I mention above if I want to make a trip, I'll go to the store where I can see it and buy it directly. This seems a defensive move, but leaving a residential package delivery in a large city is just an invitation to theft.

It would seem that the fulfillment centers would increase inventory costs and requirements (items now have to be inventoried in multiple locations) and inbound freight costs. As a true retailer it now has the issue of obsolete and slow moving inventory, a particular problem in the fast moving electronics business. (My guess as to why it is going to more 3P sellers).

The only part of the "moat" remaining for Amazon is essentially consumer laziness. Here price checking and product availability at a local store or other online supplier is the only effort required. This can be done with a few mouse clicks. This is not a moat, it isn't even a tiny babbling brook.

Amazon has become the new showroom for my family. The reviews are very helpful.

What about its other businesses? There is the Kindle and Amazon Web Services (AWS). Most people don't realize that the Kindle has been around since 2007 and AWS since 2002. Mr. Bezos does talk of a long time horizon for maximizing long-term free cash flow - but isn't this getting ridiculous?

About the Kindle:

I have three grown sons. One has never owned a Kindle, has no plans to and has never ordered an Amazon e-book. One had a Kindle. It broke and he never replaced it. One has Kindle and spends about $100.00 a year for his family of seven.

My wife bought the lowest-price one with ads a while ago. She does get things for it. I hesitate to say buy or rent, because what you are doing when you get something on your Kindle is somewhat indeterminate. She has a policy of not spending more that $5.00 for anything she orders. At their usual 30% this means a maximum of $1.50 gross profit for every sale. From the Amazon January 29, 2013, earnings announcement "eBooks is a multi-billion dollar category for us and growing fast - up approximately 70% last year." From this vague statement if multi-billion was two it would mean $600 million gross profit, if four $1200 million gross profit. But, if anything, my wife has slowed down her gets on Kindle. Extrapolating this I would guess that there may be a surge in eBook sales the first quarter to new Kindle recipients and then a slow down. Growth would only track Kindle sales, which are slowing.

I can't speak to AWS directly. The only things I know are it has been around for 11 years and is still a very small segment of Amazon's business. It has some very big competitors, and it is the one area where excellent customer service from Amazon seems to be lacking. (Ask Netflix among others.)

There are positives for Amazon. Amazon is a story stock and a momentum stock, and there are two stories that have been put out, but not yet emphasized that can give the stock price another boost. First, Amazon will come out with a smartphone. Maybe pushed for the China market. (1.3 billion consumers!) Second, Amazon will compete with Google in advertising. This too may come to pass. Third, a shill masquerading as an analyst raises his or her price target to around $400. Last, as a part of a number of ETFs it may have to be bought to maintain the proper percentage in the ETF. I am not sure what effect this may have on stock price.

Still, with the lack of a real moat and no new businesses that can show multi-billion dollar growth in the near term I am negative on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.