Amazon About to Hit Brick-and-Mortar Wall

 | Nov 15, 2012 | 12:30 PM EST  | Comments
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When it comes to Amazon.com (AMZN) investors believe the stock will keep rising as long as the company is able to grow revenue. It seems as if investors could care less if Amazon ever makes a profit. But I think that fantasy will come to an abrupt end this holiday season.

Brick-and-mortar retailers are fighting back with new tools that should blunt Amazon's revenue growth. Analysts and investors have begun to take notice.

In the last decade, Amazon has run roughshod over a whole host of brick-and-mortar retailers. It started with record stores and bookstores and now Amazon is eating through electronics retailers like Best Buy (BBY). But the big-box people are planning to put up a fight this year.

Startup Mercent Technologies is helping a number of large retailers reprice their online merchandise as fast as hotels and airlines change their prices. The goal is to have the most competitive price throughout the Internet. In the past, traditional retailers rarely changed the prices on their sites. Amazon was able to take advantage of the brick-and-mortar laziness. Amazon used its technological prowess to quickly compare prices against a wide range of competitors and lower its price just enough to win sales. Amazon flew right under the radar and scooped up the business.

But that's no more. Mercent's clients have jumped into the price-changing game, too. Mercent's technology scans prices across the Web and automatically lowers the price displayed on its clients' sites. Mercent's software automatically reprices clients merchandise at the rate of 2 million times an hour. For example, according to tests run by Decide.com, one online retailer changed the price of duct tape to $7.83 from $2.00 in a wide variety of increments in just one 24-hour period. Decide watched as the price of colored pencils change from $2.00 to $2.22 to $2.83 to $3.32. IPad prices swung $54 in either direction. Mercent's software can shave pennies off of a price so its clients merchandise always shows up as the lowest price on the Web. Prices can change hourly or even minute by minute. When competition slacks off, the software reverses course and raises prices. 

In addition, the brick-and-mortar people have revamped the search engines on their sites. Customers were frequently frustrated when they went to search a retailer's website and the search engine came up with no results or with merchandise that was wildly off the mark. No more. Wal-Mart (WMT) claims its new and improved website makes it 10-15% more likely customers will purchase after finding products. 

After being devastated by Amazon Prime, a service where customers who pay $79 a year earn free shipping, brick-and-mortar retailers are fighting back as well. Wal-Mart started testing same-day delivery in San Francisco, San Jose, Northern Virginia, Philadelphia and Minneapolis using its stores as distribution points. Other retailers, like Toys R Us, already provide in-store pickup for online orders.

Amazon's other big advantage, no sales tax, is slipping away. Big states like California, Texas and New York are forcing Amazon to collect sales tax this year. Amazon is already collecting sales tax from residents of Kansas, Kentucky, Washington and North Dakota.

In fact, according to census data about 35% of all American consumers live in states that are currently collecting sales tax from Amazon. The company will have to charge residents of New Jersey and Virginia next year and Indiana, Nevada and Tennessee in 2014. 

It seems the Street is taking a second look at Amazon as well. After knocking out revenue growth of 39.6% in fiscal 2010 and 40.5% in fiscal 2011, the Street consensus expects a sharp slowdown. According to ThomsonOne, the analyst consensus is looking for revenue growth of 29% in 2012 and 27% in 2013.  

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Using this year's estimate to make a P/E is pretty standard. Basing a multiple on 2015's projected EPS is not ...
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