Walmart Takes On Amazon

Nov. 27, 2018 2:20 PM ET

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47 comments

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About: Amazon.com, Inc. (AMZN), Includes: WMT
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D. H. Taylor
Long-term horizon, medium-term horizon, currencies, macro
(3,178 followers)

Summary

Amazon's Prime has a subscriber base of over 50% of households, but

these households are all upper income. Increases in subscribers will be
marginal.

Walmart is building a free shipping service and building on their grocery

store sales to build its customer base online.

Eventually, with Walmart's services continuing to expand, Amazon's

Prime subscription fee will need to be reduced and ultimately be free.

Amazon (AMZN) is the dominant online retailer. However, Walmart

(WMT) has taken aim and is striving to earn its share of the market. I
see this as a highly competitive arena where the competition of these
two giants, fighting for each marginal dollar spent online, will result in
the erosion of margins. The eventuality is that profit margins, already
thin for retailers, will get thinner and thinner and stock prices for these
companies will struggle to provide longterm growth for investors. But, it
is Amazon that will suffer the most. I can envision a day when Prime, a
major source of revenue for Amazon, will no longer be subscription
based; it will be free.
 Amazon is my favorite short trade

I have repeatedly spoken poorly of Amazon's valuation. I have also sold

the stock short starting at $2,000.00. I saw Amazon's stock price as
being irrationally exuberant then, and even at today's current levels, I
am leery that Amazon can return longterm value to an investor.

Here is a look at their most recent stock movement:

Amazon has three essential pillars to the company: Cloud, online retail
and Prime membership. Right now, the cloud portion of the valuation is
getting checked. Valuations got ahead of actual growth rates the
company was experiencing; the stock subsequently sold off.
But, it is not just valuations on Amazon's cloud that are going to be in
check. I believe that another pillar will eventually take a hit, that being
the Prime pillar.

Amazon has some 50% of the nation's households enrolled in Prime.

And, some 71% of households that earn $150,000 or more are already
Prime subscribers. I believe three things:

1. The easy growth on Prime subscriptions has already occurred.

2. Any new membership increases are going to be marginal increases.
3. Eventually, Prime will be free.

Amazon's Prime has 100 million subscribers, as Bezos recently revealed.

Their members ordered more than 5 billion items in 2017. As
mentioned, the company provides free streaming movies as well as
access to audio and books along with its free 2-day shipping on most
items. Revenue from Prime for 2020 is projected to come in at
approximately $18 billion.

There will still be more growth from Prime memberships. But, the
growth rate will come in at a lower pace year after year. As it turns out,
that is already happening:

Source: Morgan Stanley, via Forbes

As this chart shows, while the overall number of subscribers has been
increasing, the overall rate of growth has been slowing; there was a
28% growth rate to 2017 and a 13% growth rate to 2018.

Take a moment and think about the demographics on controlling 50% of

American households, and, those households mostly being in the top
income bracket.

The median income in the United States is $60k. Amazon Prime

customers generally spend $1,400.00 annually with Prime purchases.
Anyone below the median income would be spending a much bigger
percentage of their annual income online. This might be difficult to
justify a Prime membership. These are low and middle-income
individuals. I see this as being a hurdle for growth of Prime
memberships.

In fact, this is exactly the demographic that Walmart is taking aim at.
And that is just it; Walmart is offering more and more services, and they
are free, whereas, the comparative value you get from Prime
memberships will erode.

And, if Walmart starts to effectively convert foot traffic shoppers to

online purchasers, luring in these individuals with their grocery division
and other free services, then it may be that Amazon will need to retool
their model for revenue. Read: Eventually - and, this may take a long
time to occur - Prime will be free.