Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

Amazon the Growth Continues

Amazon (NASDAQ: AMZN) just cannot stop growing, the ecommerce giant’s revenues increased by $7.35 billion during third quarter 2016.

That means Amazon’s revenue growth in one quarter almost equaled all of eBay’s (NASDAQ: EBAY) total revenues. Amazon reported revenues of $120.64 billion for second quarter 2016 that grew to $127.99 billion at the end of the third quarter on September 30, 2016. In contrast, eBay reported revenues of $8.906 billion on the same day.

This means that Amazon’s revenues grew by $27.40 billion in the year that ended on September 30, 2016. The Everything Store reported revenues of $100.59 billion in September 2015 and $127.99 billion a year later.

Amazon’s Phenomenal Revenue Growth is Bad News for Brick and Mortar Retail

Amazon’s phenomenal revenue growth is bad; perhaps catastrophic news for some brick and mortar retailers. Since economic growth is not that fast, Amazon had to grow by stealing customers and revenue from other retailers.



The identity of some of those retailers is fairly obvious when you look at earnings reports. Staples (NASDAQ: SPLS) shrank by $1.11 billion between July 2015 and July 2016, dropping from $21.82 billion in 2015 to $20.71 billion a year later.

Macy’s (NYSE: M) revenues fell by $1.51 billion during the same period; dropping from $27.89 billion in July 2015 to $26.38 billion a year later. Target (NYSE: TGT) saw its revenue fall by $1.95 billion between July 2015 and July 2016. Target reported revenues of $73.55 billion in July 2015 and $71.60 billion a year later.

It looks as if Amazon is drawing revenue away from widely divergent businesses in vastly different niches of the retail world. It is hurting office supply retailers, department store operators and even big general discounters like Target.

Amazon has become like a vacuum drawing business away from brick and mortar stores. That cycle might be accelerating because some of those chains have been so damaged they are closing stores; Macy’s has plans to close 100 locations over the next year, and Staples has plans to close another 50 of its stores this year.

How Amazon is Conquering Small Town USA

This creates more business for Amazon because people will have fewer alternatives and more incentives to shop online. For example is shutting down stores in many smaller somewhat remote communities such as Corvallis, Oregon. That city’s newspaper; The Corvallis Gazette Times, reported that the local Staples will close for good on November 5.


Corvallis residents will either have shop at Office Depot (NASDAQ: OD) or drive to another city to shop for office supplies, if they do not want to shop online. That is until the city’s Office Depot shuts down.

There will be destructive ripple effects in Corvallis; The Gazette Times will lose Staple’s advertising and the revenue it generates. That means the paper might have to lay off reporters or even cut out a day of circulation to reduce costs.

Amazon benefits because it gets more demand for office supplies. People that don’t go online will have nowhere to go to buy many office supplies because dollar stores have a lousy selection of office supplies.

Is Amazon Making Money?

The revenue figures and headlines demonstrate that Amazon is slowly conquering small town America and possibly the world, but is it making money?

The answer currently is yes, the online retail behemoth reported a net income of $2.104 billion, its’ highest income yet, on September 30, 2016. It also reported a free cash flow of $2.645 billion on the same day. Amazon also managed to generate $14.6 billion in cash from operations.

As usual Amazon was also generating a lot of float from its operations. The company reported $18.35 billion in cash and short-term investments on September 30, 2016. A $3.92 billion increase from third quarter 2015, when Amazon had $14.43 billion in the bank.

Amazon's new headquarters in Seattle.
Amazon’s new headquarters in Seattle.

Jeff Bezos has a lot of money to play with, which is very bad news for competitors; ranging from Netflix (NASDAQ: NFLX) to the mom and pop jewelry store. He can afford to lose money on initiatives such as TV and movie production and grocery stores in order to gobble up more market share.

One consequence of that float is that Amazon will continue to grow and invest in new technology and infrastructure. That includes airplanes for its freight airline, robots, drones and much more.

Why Amazon is still a Lousy Investment

Despite that I still think Amazon is a pretty lousy investment. It is overpriced; trading at $776.12 a share on November 2, 2016, and it pays no dividend.

The return on equity was pretty good at 14.05% on September 30, but a smart investor would have found far higher returns at a lower price at Alibaba Group Holding (NYSE: BABA) (23.56% on June 30, 2016) or eBay (27.67% on September 30, 2016). Since eBay was trading at $28.40 a share and Alibaba was trading at $99.90 a share on November 2, 2016, an investor would get more bang for her buck with those stocks.

Amazon is an incredible success story and a fast growing money machine but it is still a lousy investment. There are better ecommerce stocks out there that cost less and offer better returns.