Can Amazon Overcome Stiff Competition With Its Innovation?

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Dec 23, 2014
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Amazon (AMZN, Financial) has been incurring a lot of capital expenditure to improve future profits, and this has narrowed margins. Further, it has been operating at razor thin margins to stay competitive. The major growth for the company is coming from online digital sales, cloud computing and commission from third parties, rather than direct merchandise selling. This makes the expenditures on warehouses and fulfillment centers look unnecessary as they are operating at very low margins.

Amazon keeps innovating

Amazon recently launched Elastic Transcoder, a service for transcoding video files between different digital formats. Amazon’s transcoder will help customers by providing relatively inexpensive and swift service. It will help businesses to store video on their servers at 1.5 cents a minute which makes it $3 to store a movie for instant downloading.

Amazon faces stiff competition from Netflix (NFLX, Financial) in its video streaming and TV business. Amazon though offers cheaper packages than Netflix to attract subscribers, but its limited offering of older movies gives Netflix an edge over it. Netflix has over 30 million subscribers in over 40 countries, and is clearly leading the internet television network.

It has also announced 14 new episodes of the cult TV series “Arrested Development” beginning May. It will further unveil six new TV shows in February. The company will televise previous seasons of popular TV shows such as Political Animals, Revolution and Longmire. Netflix has also signed a deal with Disney which gives it exclusive rights to stream Disney’s new releases.

A look at another retailer

E-commerce is increasingly becoming mobile commerce, and this space is shared by Amazon with eBay (EBAY, Financial). eBay’s mobile payment volumes were majorly up this year and it has 206 million mobile users, 35% more users than Amazon’s 152 million users.

eBay’s PayPal processed payments totaling $14 billion, a 250% growth in volume compared to last year. Further, it has entered into a partnership with NCR Corp. to develop apps which will help customers pre-order food. PayPal’s partnership with NCR will open a tremendous opportunity to enter into the physical world via ATMs. Moreover, eBay looks cheap at a P/E of 17 when compared to its peers having a P/E of around 47. At a P/S multiple of 4.7 times and estimated sales of $18.64 billion, the stock has a good upside potential.


The numbers does not seem to have any effect on Amazon’s share price, as they keep on soaring despite the results missing estimates again and again. The share prices seem to be totally moving on investors utmost optimism in the company rather than its fundamentals. At a P/E ratio of 3100 and PEG ratio of 4.19 times, the company seems to be very expensive. Trading momentum might raise prices further but I strongly feel it is over-valued compared to what it can deliver.