Is Amazon (AMZN) About to Take Over Retail?

by Mike Kapsch and Jeannette Di Louie, Investment U Research
Tuesday, July 24, 2012

Beginning this September, Amazon (Nasdaq: AMZN) will begin offering same-day deliveries. Is the e-commerce giant poised to take over retail altogether?

This fall, the retail market could be flipped completely on its head…

What’s about to happen?

Well, just consider this scenario:

There’s a lot of hype surrounding The Avengers DVD hitting stores September 25.

If you had the option to drive and pick up your copy at a big box retailer – like Best Buy (NYSE: BBY) or Target (NYSE: TGT) – or order it online and receive it the same day, at a not-much-higher price, which option would you choose?

Beginning this September, that’s exactly what Amazon (Nasdaq: AMZN) plans to do – same-day deliveries.

According to Slate, “Amazon is investing billions to make next-day delivery standard and same-day delivery an option for lots of customers. If it can pull that off, the company will permanently alter how we shop.”

Currently, Amazon does have local express delivery that can deliver certain items on the same day you place your order. But that’s only for customers in a few select cities who pay $79 a year to be Amazon Prime members.

This is a whole new ballgame. And in September, residents in California and Pennsylvania are going to be the first to have the chance to embrace this new way of shopping.

Probably Not Quite the Death of Traditional Retail

For me, it’s a no brainer. I’d order it online and happily sit at home waiting for it to appear on my doorstep. Of course, I personally don’t like going anywhere to shop, so my opinion could be just a bit biased.

For instance, my colleague Jeannette Di Louie feels quite differently:

“Women use traditional shopping as a way to socialize and blow off steam just as much as to actually fulfill a need. To the feminine mind, it’s quite simply fun to browse physical products for a few hours… much like men find it enjoyable to spend time wandering a golf course.”

So while traditional retailers will undoubtedly have to step up their game to keep up with their online competition, don’t expect them to be disappearing anytime soon. Amazon won’t be taking over that part of the world just yet.

With that said, its new facilities will still positively impact its bottom line going forward.

Even Creating its Own Smartphone…

Back in 1995, the company started out as simply an online bookstore, but it wasn’t long before it began expanding into other areas of commerce. Today, Amazon offers everything from media downloads to jewelry, and electronics to home improvement items, such as kitchen cabinets. And the company has been pushing more strongly into the clothing business as of late, expanding even further into the retail world.

Then there are its other capitalistic ventures, such as its eReader, the Kindle, and the growing speculation that it’s also working on its own smartphone. Yet, as if that’s not enough, the retail giant is still busy expanding, with specialized sites already established in Canada, China, France, Germany, Italy, Japan, Spain and the United Kingdom.

Ever since last fall, Amazon.com has concentrated millions of dollars into improving its shipping services. More specifically, the company is building new facilities around the country, including the Mid-Atlantic, Midwest and San Francisco Bay region.

And a number of companies could see their profits squeezed if Amazon’s same-day delivery becomes a hit. Investors better pay attention…

The Winners and Losers…

Wal-Mart (NYSE: WMT), the nation’s largest food retailer and the biggest retailer worldwide, is at the top of this list. The company has already seen its customer base fizzle at the hands of Amazon in recent years. And this latest announcement won’t help change anything for the better.

By the same token, other retailers like Target (NYSE: TGT), Costco (Nasdaq: COST) Barnes & Noble (NYSE: BKS) and Bed Bath & Beyond (Nasdaq: BBBY) come to mind.

Also, shares of clothing outlets such as J.C. Penney’s (NYSE: JCP) and/or Macy’s (NYSE: M) could soon come under fire, as well.

But Amazon sells much more than what these companies offer.

That’s why the home improvement sector could suffer. Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW) are two companies that could see shares dip if same-day delivery is as popular as many people think it will be.

Most construction jobs that require precise measurements will likely keep customers coming back to stores like Lowe’s and Home Depot. But purchasing power tools or ceiling fans or miscellaneous items probably won’t. At least not when Amazon likely has a superior selection and better prices – plus, now someone will deliver them right to your door within the same day.

Which brings us to delivery companies…

Amazon hasn’t stated plans to partner with major shipping firms such as UPS (NYSE: UPS) or FedEx (NYSE: FDX), but given how much they already benefit from Amazon, this could be one of the hot spots for investors other than directly investing in Amazon itself.

Of course, only time will tell how successful the world’s largest online retailer’s same-day delivery service will be.

Already An Impressive Bottom Line

Amazon already has an impressive bottom line. Every year, it seems to significantly and consistently grow its revenue and profits. And last quarter, it beat out even its most bullish analysts’ expectations.

Thanks in part to the increasing popularity of its Kindle Fire tablet, sales increased 34% over Q1 2011 revenue to 13.18 billion. Those kinds of results have sent Amazon’s stock skyrocketing from its recession low of $37.87 to well over $200 today.

But Amazon stock certainly isn’t cheap from a valuation standpoint – its forward P/E is nearly 90. But all that means is that there’s plenty of growth cooked into its current price. But as Alexander Green has said many times, the only thing that drives future stock prices is earnings growth. And if Amazon can continue to grow earnings at an impressive clip, P/E means a lot less about the company’s valuation. However if growth stalls, you could see a mass exodus from such an expensively valued stock.

The company will be announcing its Q2 results on Thursday, July 26. Analysts seem to have mixed opinions about how the company fared. Considering that many retailers struggled in June, Amazon might not be able to pull off another quarterly surprise.

However, if it does happen to disappoint and the stock dips, it could present a great buying opportunity. With a strong past record of growth and increasing customer convenience, Amazon looks poised to be a world dominator for some time. The only question lies in what the fair value is…

Good Investing,

Mike and Jeannette

Article by Investment U