Amazon.com, Inc. AMZN 0.41% is a very tough nut to crack. With 237 million worldwide customers, Amazon seems on the surface to be a huge success. In fact, Morgan Stanley analysts predict that Amazon will control 23.5 percent of the worldwide e-commerce market by 2016.
Amazon’s revenue and share price highlights the past decade’s growth.
Where Are The Profits?
With future revenue growth showing no signs of slowing, is it a no-brainer that Amazon stock will continue to rise over the next decade? Perhaps not.
A look at the last decade’s revenue compared to earnings per share illustrates the complexity of this situation.
As Amazon increases its revenue, the amount of earnings per share has decreased.
How Can This Happen?
Amazon has focused on gaining market share by underselling its competition. Based on the revenue numbers, this strategy has been a success. However, it has come at a cost.
Wal-Mart Stores, Inc. WMT 1.44% maintains operating margins of around 6 percent, and Google Inc’s GOOG 0.49% GOOGL 0.59% current trailing 12-month operating margin is about 25 percent. Amazon’s trailing 12-month operating margin is 0.1 percent.
By underselling all of the competition, Amazon is barely making a profit (if any) on each of the products sold. The problem is that Amazon’s low prices are what attract many of its customers. If Amazon were to raise its prices to increase its margins, it would run the risk of losing customers.
The Bulls Explain
Amazon bulls look at revenue growth, and their mouths water thinking about how much higher that number will go in the future. But with Amazon’s razor-thin margins, it might not matter how high that revenue number gets…
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Read more: http://www.benzinga.com/general/education/14/12/5055852/the-amazon-enigma#ixzz3LQGJxVEG
