Amazon Is Growing Like a Weed

Amazon.com’s (NASDAQ: AMZN) latest earnings report contained no real surprises, and that’s very bad news for other retailers. The ecommerce goliath is still growing like a weed and eating up market share like a shark at a feeding frenzy.

Indeed, the numbers tell us the same old story about Amazon: The company is growing fast, its stock price is high and it is not making that much money. That is very bad news for other retailers because it indicates that there is no real let up to Amazon’s growth and no indication that low profits are slowing it down.

Once again the most impressive aspect of the Amazon story is revenue growth. Amazon reported a TTM revenue of $107.01 billion for the fourth quarter, an increase of $6.41 billion over the third quarter, when the Everything Store reported a revenue of $100.59 billion; $11.2 billion over the second quarter, when the revenue was $95.81 billion; and $15.04 billion over the first quarter, when it reported $91.97 billion.

The inside of an Amazon Fulfillment Center shows how big the company really is.
The inside of an Amazon Fulfillment Center shows how big the company really is.

That means Amazon is adding revenue at a rate of $4 to $5 billion a quarter. It also means that Amazon added $18.1 billion in revenue over the past year. The company reported $88.99 billion in revenue for the fourth quarter of 2014.

Amazon Joins the Big Five in Revenue

Judging by these numbers, there are two safe predictions we can make about Amazon’s revenue for 2016. First, the revenue number will exceed the $110 billion mark for the first time in the second quarter, and second, it could take Kroger’s position as America’s fifth largest retailer by revenue volume.

Currently the five biggest U.S. retailers by revenue are Walmart Stores Inc. (NYSE: WMT), CVS Health (NYSE: CVS), Costco Wholesale (NASDAQ: COST), Walgreen Boots Alliance (NASDAQ: WBA) and Kroger (NYSE: KR). Here are the latest revenue figures for the Big Five:

  1. Walmart: $484.03 billion on October 31, 2015
  2. CVS Health: $149.2 billion on September 30, 2015
  3. Costco: $116.55 billion on November 30, 2015
  4. Walgreen: $112.92 billion on November 30, 2015
  5. Kroger: $108.87 billion on October 31, 2015
An Amazon Fulfillment Center in Phoenix, Arizona.
An Amazon Fulfillment Center in Phoenix, Arizona.

Judging by these numbers and Amazon’s revenue growth, we can safely assume that Amazon will displace one of the big five when the second quarter earnings are announced. It is hard say which one because both Walgreen and Kroger have significantly increased their revenue the old-fashioned way: with major acquisitions. Kroger bought the Wisconsin grocer Roundy’s, and Walgreen is absorbing Rite Aid, America’s third largest drugstore operator.

How Amazon Drives Retail Consolidation

Interestingly enough, Amazon’s success is one of the factors driving these retail mergers. Companies like Walgreen and Kroger are expanding their footprints in order to increase their resources to counter Amazon’s ability to deep discount.

These organizations want to expand their sales capabilities in order to increase their buying power. They want more leverage over suppliers and a greater ability to match Amazon’s and Walmart’s low prices.

Amazon-Warehouse-06

Amazon in particular is a threat to retailers like Walgreen and Kroger because, like them, it is right in the neighborhood. Kroger and Walgreen’s secret weapon for countering big boxes like Costco and Walmart is having convenient neighborhood locations.

Amazon is even more convenient because it can ship stuff right to the consumer’s doorstep. The Everything Store is now a direct threat to such brick-and-mortar retailers because of its ability to deep discount. This week I found two products I use—Lipton tea and Tide laundry detergent—selling on Amazon at prices lower than those offered by my local Kroger outlet, City Market. What’s more, I got them with free shipping by ordering $35 worth of merchandise.

So Is Amazon Making Money?

Not surprisingly, investors will want to know if Amazon is making money off of its new discounting capabilities. The answer is sort of. As always, Amazon reported a very low income for the fourth quarter, $596 million, but an impressive free cash flow of $7.503 billion.

Amazon has become a company that generates a lot of cash. During the fourth quarter it reported $11.92 billion in cash from operations and $19.81 billion in cash and short-term investments. Yet it had a profit margin of just 1.35%.

So it is easy to see why other retailers are scared to death. Amazon generates a fantastic amount of cash from very low profit margins. It has a business model similar to Walmart’s and some incredible growth potential.

The growth is self-perpetuating because Amazon can use the market share and cash flow to force suppliers to give it ever deeper discounts. The discounts drive more traffic to Amazon, which increases its ability to discount. This has enabled it to severely damage department stores and devastate some specialty retail segments such as toys and women’s clothing.

This brings us to the most important question: How long can Amazon’s rate of growth be sustained? That’s impossible to say because the Everything Store is moving into completely uncharted territory here. We have seen retailers grow at similar rates before—Walmart did in the 1990s—but we have never seen such a nontraditional discounter expand so quickly.

My take is that Amazon will keep growing like a weed for the next few years, but its growth will never justify its over-inflated stock price. That makes Amazon a really great company I like to do business with but a very lousy investment.