From Seeking Alpha:
Amazon is unfairly punished by the market due to its lower growth guidance. The company has shown a continuous fall in growth rates from its online stores segment, which makes over 50% of the total revenue. This segment is the lowest margin business for Amazon. On the other hand, highly profitable segments like AWS, advertising, and subscription revenues are growing at a rapid pace. Initiatives in digital payments will also improve the moat and growth potential for the company. These segments will make a bigger portion of the overall revenue in the next few quarters.
This trend will help Amazon in delivering rapid growth in profitability over the next few quarters. Even if the revenue growth falls below the 20% mark, we could see substantial bullish sentiment for the stock in the next year as the company reports better profitability. It is also important to note that lower online stores sales growth reduces the pricing pressure on the company, which also helps in improving overall profitability.
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Amazon’s growth story has been dependent on the fact that the company was reporting one of the highest growth rates for a retail-centric business. In the recent quarter, Amazon’s management has given a substantially lower guidance than what was expected by the market. This has been interpreted as the eventual saturation of Amazon’s growth potential. There are a number of reasons why this assumption is wrong.
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In the recent quarter, online stores segment showed a growth rate of only 11%, excluding F/X. There was a massive decrease in growth from year-ago quarter when the growth rate was 22%. In my opinion, Amazon has complete control over the level of growth it wants to show in online stores segment. The company can easily tweak its algorithm and reduce prices to increase sales on its e-commerce platform.
Obviously, if the company is aiming for higher growth rate, it will need to aggressively give discounts, which increase pricing pressure and reduce margins. On the other hand, if the company is opting for lower sales growth in online stores, then the pricing pressure would be much lower, and margins would expand. The company’s lower guidance for revenue growth means that the management does not feel a major upside in offering bigger discounts on its online platform.
Link to the rest at Seeking Alpha
PG is wired to look for good deals and has noticed in recent months during some of his explorations of prospective acquisitions that Amazon has ceded the lowest-price position to competitors in some product categories.
He hasn’t observed this phenomenon with books, possibly because because Chinese knock-off producers haven’t tried (or haven’t successfully tried) to pursue that market.
OTOH, for small electronic products, PG is convinced there are at least three Chinese knock-offs for every non-Chinese seller in almost every product category.