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When Will Amazon Make the Big Change?

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Last quarter, Amazon (NASDAQ: AMZN  ) managed a 4.9% operating margin in the U.S., while its international business posted a negative 0.2% operating margin. The company has always worked on the premise that lower margins through more selling still equals more, but the rut doesn't seem to have broken yet. Back in 2010, analysts were expecting margins to begin their rise and finally reward investors who had watched as the company pushed promotions and innovation.

Those big gains have yet to come, but recent analysis has seen some prices starting the slow climb. Does that mean that the end of thin times is upon us, or is there still a wait for the big jump?

Blood from the stone
Amazon lost money last year. The company recorded a net income of negative $39 million, even though it managed revenue of $61 billion. Even with that loss, the company has continued to see strength in its stock. Shares have risen 25% over the last 12 months, beating out the S&P 500 return of 19%.

The trick is that the companies that Amazon is beating down have done even worse. Barnes & Noble (NYSE: BKS  ) and Best Buy (NYSE: BBY  ) are succumbing to the pressure, both companies losing out over their last financial years. The difference is that Amazon seems to be in control of its losses, while its competition is just being jerked around by the online retailer.

Best Buy, at least, has made a move to try to staunch the bleeding. The company has been price-matching Amazon and other retailers since Christmas 2012, and in March it implemented a low-price guarantee program that offers shoppers 15 days after purchase to find a lower price from a competitor.

Even with that level of competition, Best Buy can't match the huge revenue advantage that Amazon has. By selling so many products, Amazon can offer loss-making prices on some, while generating enough free cash to keep pushing by adjusting the prices of its more popular items. The result makes the company seemingly unstoppable.

Increasing the flow
Now Amazon may be making a move to get more out of the physical goods that it sells. While management has highlighted the investment cost of the Kindle and its digital content, a report from The New York Times pointed out that many book prices have started to rise. The theory is that Amazon is realizing that it's moved beyond the reach of serious competition, and no longer needs to fight every battle with its full force.

That could mean more coming in for investors, but I think it's too soon to tell. Amazon has replied that its prices are as low now as they've ever been, and the price changes are still too spotty to be considered a major trend. It's still an encouraging sign, and it may be that it highlights how close Amazon is to making the price shift change. For now, investors should continue to enjoy the wild ride that Amazon continues to offer, while pushing the company for a more aggressive pricing system. I'll be looking for a more substantial difference by the end of the year, as the Nook and other competitors fade into the history books.  

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9/23/2016 4:00 PM
AMZN $805.75 Up +1.05 +0.13% CAPS Rating: ****
BBY $37.99 Down -0.48 -1.25%
Best Buy CAPS Rating: *
BKS $10.98 Down -0.04 -0.36%
Barnes and Noble CAPS Rating: *