How Safe Are Retailers From Amazon.com, Inc.?
Amazon.com, Inc. (NASDAQ:AMZN) has dramatically altered the retail industry, making owners of AMZN stock very wealthy and leaving some industry stalwarts struggling to catch up.
The retail sector is in the limelight as retailers look to grab your cash in what is the most significant consumer spending period of the year, which began with Black Friday.
For many retailers this year, success during this four-week period leading up to Christmas could determine whether it’s profit or loss for the entire calendar year (hence the term “black;” being in the black means a company’s income statement is positive).
While shopping at the malls and stores continues to be popular, we have been seeing more and more shoppers bypassing the craziness that often materializes at the stores, instead shopping via the comfort of buying online at home and the office.
In fact, the industry shift towards online retail shopping has been so dramatic over the past several years that many brick-and-mortar retailers have been left behind.
A great example of this industry shift in the retail sector can be seen at Wal-Mart Stores, Inc. (NYSE:WMT), which has been struggling with global sales.
The problem, as I discussed in a previous commentary, was the failure of Wal-Mart to really focus more on its online presence, instead providing a somewhat second-rate online shopping experience.
You can blame Amazon.com for the retail woes at Wal-Mart.
Massive Upsurge in Online Sales to Drive Amazon
While we are waiting for the numbers from Black Friday, I think the focus should be on Cyber Monday.
In 2014, consumers spent about $2.65 billion online in the U.S., according to the Digital Index Online Shopping data produced by Adobe Systems Incorporated (NASDAQ:ADBE). (Source: “Adobe Data Shows Cyber Monday Sales Up 16 Percent; Large Retailers See Biggest Gains,” Adobe, December 1, 2014.) That represented a 16% year-over-year increase including $30.0 million or so on average by the top 25 retailers, which saw their sales surge 25%.
The early prognosis is that we will see another stellar Cyber Monday this time around. FatWallet.com suggests that close to 70% of online shoppers planned to spend the same or more this year. (Source: “Cyber Monday Data Points to Continued Spending Splurge,” PR Newswire, November 23, 2015.)
All of this bodes well for Amazon.
Amazon: Best in its Class
Amazon stock is rocketing higher on the price chart, while Wal-Mart is comatose. AMZN has managed to build an impressive online presence that makes it easy and seamless for consumers to shop. Simply compare the two sites and you’ll see the difference.
For the online shopper, it’s all about the experience. Amazon is a standout because it offers millions of goods from retailers and suppliers around the world. Whatever you desire, you will likely find it at Amazon. Enter the order and the product will be at your doorstep overnight or in a few days. The company also offers same-day delivery on certain goods in some regions—and it is looking at drone delivery in the future.
So, while WMT spends tens of millions on retrofitting stores, Amazon continues to refine its online technology.
How to Play Amazon
AMZN stock is clearly the market leader in the surging online retail sector. The stock is currently trading just below its record high of $682.00, so there is naturally some hesitation to buy, especially given that AMZN stock was trading at only $285.00 in January.
Chart Courtesy of StockCharts.com
An interested investor could wait for price weakness to enter or alternatively play the stock via selling put options with a strike price they feel comfortable buying the stock at, while at the same time generating some premium income and potentially lowering the adjusted cost base. Option traders could also look at adding leveraged call options if the premiums aren’t too excessive. However, please note that this is not a recommendation to buy this or any particular stock.