Challenges to's Growth Strategy (NASDAQ: AMZN  )  has plenty of opportunity to continue growing revenue at double-digit rates for the foreseeable future. However, it is important to acknowledge the significant challenges that exist in's pursuit of further market share gains from established retailers such as Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) . Profitability pressures have forced to consider price increase to its wildly popular Prime service, and this could be the first of many challenges facing the company in the near future.

Past failures will not be the last has a great track record of innovating and reshaping the consumer experience. While the company has used this success to deliver tremendous revenue growth, it is unlikely that every venture will be a success. While it is a distant memory, was an company that is often considered one of the biggest flops of the dot-com bubble.

More recently, invested $175 million in LivingSocial to enter the daily deal business. While LivingSocial still exists today, the outcome for was not much better than given that the company wrote off almost its entire investment in LivingSocial in late 2012.

Each time expands its e-commerce empire, there's the risk of failure. Management has taken years to fine tune the AmazonFresh grocery delivery concept to avoid a repeat of the fate of Webvan, one of the most notable dot-com failures in history. However, what does it mean to investors if grocery delivery service simply cannot be attractive to consumers relative to brick-and-mortar competitors while also being profitable?

Competition will not sit still
While has accumulated significant market share thanks to a great customer experience and disruptive e-commerce business model, it is naive to think that competitors are not devising plans to combat's ongoing growth. Some of these strategies will fail, like Best Buy's price-matching guarantee to combat "showrooming" this holiday season, but others will have success.

With hundreds of retailers fighting for market share, there will be plenty of competition. Wal-Mart is a great example; the company is testing same-day delivery including grocery delivery services. If Wal-Mart can effectively match the services offered by, Wal-Mart may have an advantage as e-commerce continues to evolve given its existing scale. Target, grocery stores, pharmacies, and other retailers are also working to find new ways to add the convenience of same-day delivery and in-store pickup of online orders. 

A looming price war
Assuming competitors can match's interface, selection, and delivery speed, the next threat to the company is a price war. Given's long-standing preference to accumulate market share rather than generate profits, a price war could put a dent in's business. The chart below illustrates how a wide range of competitors generates more operating income than

AMZN Operating Income (TTM) Chart

AMZN Operating Income (TTM) data by YCharts

With significantly higher operating incomes, these companies have the ability to fight back with lower prices as a defense against's ongoing growth. This is particularly true for Wal-Mart, which consistently generates operating income margins above 5% while investing in an e-commerce platform and same-day delivery services that rival those of has already acknowledged the limitations it faces in its quest to provide unparalleled price, selection, and customer service; the recent announcement of a planned increase in Prime subscription fees from $79 to somewhere in the $99-$119 range means that is starting to feel the squeeze from its low-margin model. Further pressure from a price war may impair's ability to grow.

Is still a buy?
There is certainly risk associated with an investment in A failed expansion into a new market, competition, and lack of flexibility due to lower operating margins are all concerns to monitor. Future evidence that any of these challenges might impact's long-term growth should be very seriously considered in evaluating an investment in the company.

However,'s core strengths and significant room for growth are unparalleled. Without the baggage of brick-and-mortar store costs, has been able to maintain a high growth rate for years. Until there is strong evidence that a competitor can create a more compelling value proposition for customers in terms of selection, price, fast and free shipping, and overall experience, it is likely that will continue on its growth trajectory.

Thanks to a decline in share price following last quarter's growth of "only" 20%, shares of can be purchased at a reasonable price considering the long-term outlook for the company's ongoing growth. 

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Brian Shaw

Brian is a contributor to The Motley Fool that seeks to translate the investing wisdom of Peter Lynch and other investing legends into timely coverage of consumer goods companies.

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