All the recent hype about Amazon (NASDAQ: AMZN) in the stock blogosphere seems to be justified. Although I still think the Everything Store is grossly overpriced, I must admit that it is a great stock.
The problem is that Amazon is a great $100 or $150 stock, not a great $765.55 stock. (Yes, that was what it was trading at on August 5, 2016). Even though its numbers look great, I see nothing here to support the $765.55 number.
Amazon’s Incredibly Growing Cashflow
Despite Amazon’s performance is very impressive in this very lousy economy. Some highlights of its Second Quarter performance include:
- Revenues that cleared $120.64 billion for the first time. This means that Amazon is now bigger than Costco Wholesale (NASDAQ: COST) and Walgreens Boots Alliance (NASDAQ: WBA). Costco reported revenues of $117.89 billion on May 31, 2016, and Walgreens reported $117.24 billion in revenues on May 31, 2016.
- Adding $7.22 billion in revenue in one quarter. Amazon reported revenues of $113.42 in March 2016, those revenues grew to $120.64 billion in June.
- $1.931 billion in net income. That’s a very impressive number because Amazon reported a net income of -$188 million in June 2015. Amazon is now making money and its net income is growing. Its income in a year grew by $1.93288 billion, if this continues Amazon’s net income should exceed $2 billion in September.
- A diluted earnings per share ratio of 4.03 for those of who value such figures.
- A profit margin of 2.82%.
- A free cash flow of $1.754 billion. That’s right folks Amazon reported a free cash flow in March 2016, it reported a free cash flow of $-3.334 billion.
- A return on equity of 14.02%.
- Assets of $65.08 billion.
- Cash and short term-investments of $16.54 billion. This figure is tremendous for a retailer, Walmart (NYSE: WMT) reported having $7.597 in the bank on April 30, 2016. Costco reported $6.021 billion on May 31, 2016.
- $12.73 billion in cash from operations. Like the revenue this number keeps going up and up. It was $11.26 billion March 2016 and $8.98 billion in June 2015.
- Amazon’s cash from operations grew by $3.75 billion in just a year rising from $8.98 billion in June 2015 to $12.73 billion in 2016.
- A market cap of $363.12 billion on August 5, 2016.
- An enterprise value of $352.33 billion on August 5, 2016.
If this growth keeps up Amazon’s revenues will exceed $130 billion at some point next year. That will make it America’s third largest retailer; after Walmart and CVS Health (NYSE: CVS). CVS reported $166.73 billion revenues from its pharmacies and health plans on June 30, 2016. Walmart reported $483.21 billion in revenues on April 30, 2016, so Amazon still has a long ways to go to become number one.
What Will Amazon do Next?
All this shows us that Amazon that has a vast amount of cash and float. It now has the raw economic power to completely dominate online retail in North America and possibly Europe.
It is little wonder that companies like Walgreen are abandoning or paring back their ecommerce operations. Amazon seems to own the space or a large portion of it.
My guess is that Amazon will use this power to continue to clobber brick and mortar retailers. Its next moves will be to go after discounters like Dollar General (NYSE: DG) and to make a direct assault on Walmart, Costco and Kroger (NYSE: KR) with low cost groceries, toiletries and household supplies.
Bezos will have to be very careful here because sooner or later he will attract the attention of antitrust regulators, pundits and politicians. One Presidential candidate; Donald Trump, is already gunning for Jeff and Amazon. Trump has garnered a lot of attention by bashing Amazon, that lesson will not be lost on politicos of both parties.
Yes Jet.com and Walmart could be a Threat to Amazon
Naturally investors will wonder if anybody could compete with Amazon. Interestingly enough there is one potential threat to Amazon – the combination of Walmart and Jet.com.
Walmart; which is in the midst of an aggressive ecommerce push of its own, bought Jet.com for $3 billion on August 8, a press release indicates. Jet is an online discounter that uses a complex set of algorithms to offer really low prices. Jet is a pretty good fit for Walmart because it engages in deep discounting.
When I heard about this deal I wasn’t familiar with Jet; so I went to its website and did a little shopping as research. From what I saw there Jet is definitely a threat to both Walmart and Amazon. I ordered four items I regularly use; Tide Laundry Detergent, Quaker Oat Meal, Lipton Tea and Scotch Packing tape, to get the $35 free shipping.
I was pleasantly surprised to discover that Jet has the larger sizes of items; normally available only from club stores like Costco, at good prices. I was able to order 80 ounces of Quaker Oats which normally retails at Amazon for around $16 for $9.71 from Jet. Meanwhile, 95 ounces of Tide was about $1 more than at Walmart; and 312 Lipton tea bags were $9.66 about the same price as at Amazon.
What I really liked at Jet was the no frills shopping experience I found the stuff I wanted fast at really good prices. Jet’s selection seems to be better and it was easier to get free shipping with no strings attached.
Another feature I liked was the additional savings. For example I got a little money off for opting out of free returns. Since Tide is good stuff that I probably won’t return, why pay extra for a return?
I was pleasantly surprised that all the items would arrive within a week. One of my pet peeves with Amazon; is that it can take two or three weeks for stuff ordered with “free shipping” to arrive.
Jet’s current business model looks like a real threat to Amazon right now. If it can be successfully combined with Walmart’s resources and massive logistics system, Jet would be a major problem for Amazon.
Walmart and Jet Would be a Threat to Costco and Amazon
My guess is that Jet would appeal most to people that don’t like to shop, and to those that just want to save. This will include millennials (those under 35), rural residents and small businesspeople. Hopefully it’ll force companies like Amazon and Walmart to lower prices and raise the bar on customer service.
Judging by my experience – a Jet.com/Walmart combo will be a big threat to Costco offering the same stuff without the membership charges. A major problem for Costco would be Walmart combining Jet with its Shipping Pass (unlimited two-day shipping for $49.99 a year) or its Sam’s Club subsidiary.
It would also present a huge headache for bottom-feeding retailers like Dollar General by offering a better selection of items at lower prices with free delivery. Dollar General in particular operates a lot of small town stores; which might not be viable with Walmart.com/Jet offering larger sizes at low prices with free shipping. Those stores only succeed because there is no other discounter within reasonable driving distance.
Amazon would also face problems because Jet-Walmart would offer lower prices than Prime. It would certainly attract customers that were not interested in all the Prime services like streaming video.
Amazon’s position is pretty secure right now, but there is a potential retail combination that might threaten it. Acquiring Jet might give Walmart the capabilities it needs to make a serious assault on Amazon. The online retail landscape is about to change dramatically to the detriment of brick and mortar retailers.
The Everything Store’s position is safe right now, but there is a potential competitor that might give Amazon a run for its money on the horizon. Whether that competitor Walmart-Jet will hurt Amazon or brick and mortar retailers more remains to be seen.