Amazon (NASDAQ:AMZN) has been basking in the glory of higher sales and share prices, thanks to a phenomenon known as “showrooming.”
That’s when consumers hit their local stores to get an up-close look at a product, but then head home to purchase it online.
Chances are you’re guilty of this behavior, too, since an annual Harris poll shows that 46% of Americans admit to showrooming (up from 43% the year before).
For years, analysts perceived showrooming as the biggest threat to traditional brick-and-mortar retailers. And as the dinosaur in the business, Amazon has been the biggest beneficiary of this habit for years.
But is the company’s entrenched competitive advantage about to backfire?
Brick-and-Mortar Resurgence
For the first time ever, Harris chronicled a higher occurrence of the opposite trend. That is, reverse showrooming, or “webrooming.”
That’s when consumers do research online, but then head to a physical store to make a purchase.
Granted, by no means are these behaviors mutually exclusive. Consumers do both. But the data does bust the widely held belief that showrooming is the most prevalent.
As you can see, the opposite is true, which indicates a much more significant and ominous development for Amazon investors.
Simply put, traditional retailers are fighting back. And it’s working!
They’re embracing consumers’ desire to research purchases first by offering in-store Wi-Fi. Couple that with exclusive mobile app discounts, and they’re winning back business.
This isn’t altogether surprising.
As I shared on CNBC last fall, Amazon’s cost advantage has been eroding.
With shipping prices on the rise and more states collecting sales tax from online purchases, items on Amazon could actually end up costing consumers more in the near future.
Now, we’re all suckers for the best deal. Especially in the wake of the Great Recession, which instilled a heightened cost-consciousness in us.
Add it all up, and the offline option is becoming more compelling. And that spells trouble for Amazon, given its razor-thin margins and stratospheric stock valuation.
At current prices, shares trade hands for more than 170 times forward earnings. Like Bon Jovi, investors in the stock are “livin’ on a prayer.” Here’s why…
Beware of Gravity
For as long as I can remember, Amazon’s stock has been (over) valued based on the company’s potential to turn a profit in the future. The rationale being, the more and more customers Amazon attracts, the more it can eventually monetize that user base.
After years of investing untold hundreds of millions of dollars in growth initiatives, the day of massive profitability still remains elusive.
In fact, last quarter, Amazon reported a much wider-than-expected loss of $126 million, or $0.27 per share. (Analysts expected a loss of $0.15 per share.)
And the company is projecting even more losses this quarter.
Finally, investors appear to be growing impatient with Amazon’s “perpetual investment mode,” as Standard & Poor’s analyst, Tuna Amobi, puts it.
For good reason, too.
It seems that Amazon’s master plan is to keep investing gobs of money in additional low-margin businesses.
Take, for instance, AWS, Amazon’s cloud-computing operations.
The company plowed over $1 billion into it so far this year – with billions more expected. Bulls love to play up the profit potential of this division.
Newsflash: Cloud computing is a commodity business, netting mere pennies per hour of server usage. It’s an increasingly competitive market, too.
Case in point: Since 2006, Amazon has cut its cloud-computing costs more than 40 times to stave off competition from Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOGL). Yet the price wars continue to this day.
Amazon’s most recent foray into the smartphone market smacks of another ill-fated expansion into a highly competitive, notoriously low-margin business.
I’m sorry. But continuing to invest in low-margin business doesn’t add up to meaningful profits in the end.
Bottom line: The game of valuing Amazon based on its soaring revenue has gone on ever since the company went public – back in the heyday of the dot-com boom. But profits ultimately matter. No exceptions. So it’s only a matter of time before Amazon shareholders confront this reality.
Look out below!
Ahead of the tape,
BY Louis Basenese