Wednesday, January 30, 2013
Amazon Missed On All 5 Key Metrics: Business Model In Jeopardy While Analysts And Investors Are Pleased

"Analysts are dead wrong to point to gross margin increases as a sign of a healthy business model, as that metric is a false indicator of potential with Amazon. Amazon is simply transferring costs below the line so that while gross margin goes up, net margin will continue to drop (case in point: in the 4th quarter net margin was cut in half as gross margin improved 330 basis points)." 

Also, echoing my own conclusions:

"The Amazon business model, while good at delivering outsized growth, is wrought with profit peril. It draws massive pricing competition in its core markets and when coupled with its move to consignment distribution through FBA, unit growth has far outpaced revenue and delivered significant ASP erosion. These factors have driven the cost of fulfillment up dramatically, and in spite of improving gross margins, had led to net income dropping substantially. Trends show that these economic impacts on the income statement cannot be overcome anytime soon, and attainability of lofty profits as forecasted by analysts is in jeopardy. Anything Amazon does to alter the business model (end Prime, separate Instant Video into a paying subscription, raise shipping costs, sell Hardware at a profit, end discounting, etc...) will lead to reduced growth, so there is no easy answer for management. In spite of the obvious risks, investors have resoundingly approved the business model evidenced by the current bubble level valuation. Due to that, I believe Amazon will continue its business practices to feed that monster, setting up a very interesting short opportunity for 2013."

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