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Tuesday, April 2, 2013 - 13:00
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Tuesday, April 2, 2013 - 13:00

3 Reasons Amazon is Now Just Another Internet Stock

Tuesday, April 2, 2013 - 1:00pm

For years, Amazon (Nasdaq: AMZN) has been hailed as the king of the e-commerce hill.

After all, it pioneered the industry, gaining a competitive market share in nearly every field it's asserted itself. But as with any company, size and time seem to have caught up with Amazon, knocking it down a notch.

This pessimistic stance on the company is likely to ruffle feathers. But before dismissing the idea that Amazon is anything but bulletproof, consider three realities that would be deemed red flags for any other company.

1. Contempt for partners
A few weeks ago, Amazon announced it would raise fees for some third-party sellers. For example, the price to list some electronics accessories reportedly jumped from 8% to 15%. The company cited rising fuel costs as one reason for the fee hike.

The most affected sellers cried foul and threatened to take their business elsewhere. Often, customers complain about higher prices without changing their behavior. But these may not be idle threats -- alternatives exist. Competitor eBay (Nasdaq: EBAY) offers a comparable service, and lowered its listing fees shortly after Amazon's increase. Google (Nasdaq: GOOG) also provides an e-retailing venue demonstrated to be more cost-effective than Amazon's charges to third-party sellers.

While Amazon may raise its fees, that doesn't inherently mean the end of the company. But it does suggest some lack of regard for its partners. Amazon chose to build dozens of new fulfillment centers and offer free shipping for "Prime" customers. Now it's shoving those costs onto retailers who had no say in the matter. It's not exactly a move that makes newcomers want to do business with the company, and considering third-party sellers drive nearly 40% of Amazon's sales, this is no small matter.

2. Lack of focus
In Amazon's early days, when it was just selling books and electronics from only a few warehouses, business was simple, straight forward and reasonably profitable. But Amazon evolved into the business of e-books, digital streaming video, cloud hosting services, tablets and, most recently, smartphones. Those industries are already saturated and not particularly high-margin businesses. Net margins from Netflix (Nasdaq: NFLX), for example, are around 6% in a good year.

The problem? Amazon could fend off new e-commerce competition just by overwhelming newcomers. But it's unable to do that on the digital content and consumer electronics front, where bigger competition is already established.

A look at Amazon's numbers shows that its 2010 revenue of $34.2 billion climbed to $61 billion in 2012, while operating income dropped from $1.4 billion to $676 million, respectively. These new ventures are proving very expensive.

3. No longer shielded by a wide moat
Not only is Amazon facing competition in its new ventures such as digital content and consumer electronics, its core e-commerce/delivery business is starting to feel pressure.

Amazon's early investors enjoyed a "wide moat" -- no other e-commerce name had the wherewithal to rival Amazon's dominance in the books or electronics markets. And the company kept competition at bay for years. But within the past couple of years, some deep-pocketed e-commerce names have started to make a dent in Amazon's third-party seller business.

Google is one of those threats. Wal-Mart (NYSE: WMT) is also turning the heat up with its Wal-Mart Marketplace, where third-party sellers can offer their goods online through the company's website. Although only six merchants are on board, more are rumored to be on the way -- Wal-Mart is reportedly pickier than Amazon about its third-party vendors.

Neither Google nor Wal-Mart generate anywhere near the e-commerce business that Amazon does on an annual basis. Wal-Mart's Web-driven revenue of about $9 billion in 2012 was dwarfed by Amazon. On the other hand, Wal-Mart got serious about its e-commerce channel in 2012, when it hired more than 15 engineers to build a search engine to spur more e-commerce business.

Time will tell how the competition plays out, but with the likes of deep-pocketed Wal-Mart and Google ramping up their online-sales efforts (especially through third-party sellers), Amazon's "wide moat" is no longer so wide.

Risks to consider: Threats or not, Amazon is one of those few companies that can muster support based on nothing more than a premise. Given the stock's history of blind bullishness, it's possible the market could come up with reasons to ignore these challenges.

Action to take --> This isn't to say Amazon is on its death bed. Indeed, the company will likely be around for a long time. But its era of dominance is over, and it's no longer a must-have growth investment. There's no need to sell it immediately, but now's the time to start opening your mind to stronger e-commerce stocks that could outperform Amazon in the future.

James Brumley does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.