The AMZN Effect
April 8, 2018
To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers. – Adam Smith
In this age of Amazon (AMZN), I have just one question: Are we fading from a nation of shopkeepers into a nation of simply shoppers?
I’m very worried about America becoming a nation of worker ants content to get bargains at the cost of jobs and individual opportunities. Globalists continue to say that AMZN is great because it brings a deflationary aspect to consumers and the economy, but there are aspects to the situation that have a Faustian element.
Over the years as AMZN has growth stronger, entrepreneurship has drifted lower despite the fact that new businesses rely on the website. Hundreds of brick-and-mortar retailers have gone out of business and millions of jobs have been lost. And those losses only continue to mount as witnessed by recent headlines.
- Healthcare stocks lost $30 billion in market value after the company announced plans to launch an independent company that would provide healthcare for its employees
- Grocery stocks tanked after AMZN bought out Whole Foods Market (WFM). And when the e-commerce giant slashed WFM’s prices, Sprouts Farmers Market (SFM) fell nearly 10%.
- Department stores have been some of the biggest losers, with total revenue declining $29.6 billion between 2005 and 2016 while internet retailers gained $27.8 billion. Department store employees are down from 1.609 million in 2005 to 1.273 million currently.
Then the shipping and packaging industry felt the heat in February after AMZN announced plans to create its own package-delivery service called “Shipping with Amazon,” or SWA. As a result, FedEx (FDX) and UPS (UPS) lost a combined $60 billion in market value.
This has attracted the attention of President Trump, whose disdain clearly reflects his frustration with The Washington Post – owned by AMZN’s CEO Jeff Bezos – which has launched a never-ending war against his ideas and presidency that includes dismissing obvious successes.
President Trump vs. AMZN
Trump has long been wary of the advantages enjoyed by AMZN, and he’s been hinting that he’s prepared to take action to level the playing field for small businesses. There is a lot of speculation as to what such actions might be – everything from an internet sales tax to breaking up the company has been discussed.
There’s no doubt that AMZN has built a juggernaut by using loopholes. For years it paid no state or local taxes. There is no internet sales tax, and it’s also utilized advantages like its great deal with the U.S. Postal Service. However, there is a greater issue with investors who have given the company the kind of valuation that has created unlimited access to funds and the ability to operate at a loss.
The U.S. Postal Service deal has garnered a lot of attention recently. The relationship began in 2013 when the Postal Service was losing billions of dollars. Amazon fixed its costs at a certain level, and now that things have really taken off the Postal Service has had to pay not only for the shipping but also higher labor costs in order to get everything done and out the door.
Here’s the irony of it all – years ago lawmakers put into effect a sort of stipulation that prevented the Postal Service from being competitive. Because it can’t compete with the likes of FDX or UPS, it is greatly limited in what it can do.
The bottom line is that the Postal Service cut a bad deal with AMZN and provided the company with an amazing subsidy that it has been able to take advantage of. I hope there are adjustments, but the bureaucrats at the Postal Service have watched their unnecessary demise for decades.
Shares Oversold at Current Prices
President Trump’s constant tweeting has sent AMZN back down to early February prices and below its 50-day moving average (the blue line). In fact, it took its biggest one-day drubbing in history on Monday when it fell 5%.
I think the shares are oversold and therefore a screaming buy at current prices. That said, I also see a day of reckoning down the road that could see action by this administration or another from either party to break up the company.
I believe there is a net negative to society beyond low prices only achieved because of stock valuation and convenience. By the same token, retailers are learning how to compete better and one day AMZN will face true competition that stems its juggernaut tide. Until that day, though, AMZN is a must buy for any long-term portfolio.