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Could Amazon's Fee Hike Have Bigger Impacts Than Thought?

March 23, 2013 | About:
Muhammad Bazil

Muhammad Bazil

3 followers
Amazon.com, Inc. (AMZN) acquired significant growth in the past year, and it has consistently enjoyed very high customer satisfaction over the long term. The company accounts for around 40% of unit sales. Such high sales have driven Amazon’s revenues and market price to record highs. However, some factors that may have a detrimental impact on the company’s financial performance have become apparent recently.

Fee Hike for Sellers

Amazon has earned very high margins from third-party sales as the company deducts fees on all the sales made on the site by third party sellers. Amazon has justified the imposition of high fees with the rising costs of operations. According to the company, the costs of logistics are rising continuously. In order to ensure a healthy balance between cost and revenue, it has become imperative for Amazon to increase fees from time to time.

Another justification for the hike given by the company was the prospective improvement in the service. According to its representatives, Amazon has invested in some changes in its logistics that will result in quicker shipping of products to the customers.

Although the company’s justifications are valid, there are some factors related to fee hikes that may have a negative impact on Amazon’s revenue and profitability. A noticeable proportion of Amazon’s revenue is constituted by the fees imposed on third party sellers, and with the hike in fees, the third party sellers are willing to switch to a competing service. Some sellers have expressed that the high cuts kept by Amazon leave the sellers with a minimum margin, thereby rendering the whole relationship pointless. Thus, the increase in fees could cause a decline in Amazon’s revenue instead of increasing it. Additionally, this situation can also weaken Amazon’s position against its competitors such as eBay and Wal-Mart Stores, companies that are providing similar services at significantly lower costs.

Rising Competition

The growth in Amazon’s business over the years can be seen in the diversification in its business. From being a simple online store to a successful player in the tablets market, Amazon has come a long way. However, the company has also attracted stiff competition. The main competitors of Amazon are: Apple Inc. (AAPL) and eBay Inc. (EBAY).

Apple Inc. is in direct competition with Amazon with regard to its tablet business. Amazon’s Kindle tablets have received enormous global success; and this success has made Kindle the competing product against Apple’s iPad. Apple Inc. is still facing a declining market performance since it reported financial results that were lower than expected. Despite the declining market performance, Apple Inc. holds a very strong financial performance with the profit margin for fourth quarter 2012 standing at 23.99%, whereas Amazon’s profit margin for the same quarter was 0.67%.

EBay Inc. is a direct competitor of Amazon as an online store business. With the recent hike in fees by Amazon, eBay is in a favorable position as increasing numbers of third party sellers are willing to switch to eBay in order to sell their products. This may give eBay a stronger position against Amazon. The profit margin of eBay for the fourth quarter 2012 was 18.81%, significantly higher than that of Amazon.

Amazon’s Market Performance

The market performance of Amazon has remained mostly positive in past months. At the time of this edition, the shares of the company are being traded within the range of $254.55 and $259.76. The 52-week range of the share price of the company has been between $182.88 and 284.72. The difference between the two extremes suggests the extent of growth in share price over the past months. The following chart represents the trend of the company’s share price over the past year.

455768974.jpg

The chart reflects that the average trend of Amazon’s share price has remained positive; however, some considerable fluctuations can also be observed.

After the analysis of the relevant factors, in my opinion, investors should hold their investments in the company. I believe that the shares of Amazon are being traded at a very large multiple which makes them a risky investment. Even a small uncertainty can have a detrimental impact on the market performance of Amazon. Also, the business risks the company faces due to strengthening competition may also influence the market performance in the foreseeable future.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

Rating: 4.0/5 (2 votes)

Comments

river-pishon
River-pishon - 1 year ago
I, for one, will probably not buying as much from Amazon. The $25 free shipping threshold was more attractive than the new $35 one. Did they have to increase it by 30%? I must confess I have bought things that I didn't need at the time just to get free shipping. That will not apply nearly as much now. Might as well get it from Wal-mart with free ship to store.

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