Unless you've been living out in woop woop for the past year you'll know that U.S. online giant Amazon is set to launch its Australian operations this week in a move that could dent the profits of listed Australian retailers.
Even if the potential loss of market share isn't too damaging, the margin-crunching activities of Amazon could prove destructive to local retailers' profits thanks to Amazon's business model that emphasises top-line growth over profits.
In Australia for example leading retailers like JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) or Premier Investments Limited (ASX: PMV) are rated by investors for their healthy income streams.
This means they pay out the majority or nearly all of their annual profits to investors in dividends, which leaves little cash left over to reinvest in the business. This is partly because share valuations will be marked down by short-term focused investors trained to value stocks on future free cash flows with present values time weighted towards near-term cash flows.
However, Amazon's founder, Jeff Bezos, is famous for paying no dividends and re-investing the company's free cash flow to grow the business over the long term regardless of how analysts are traditionally trained to value stocks.
For Amazon "bottom-line profits" are considered irrelevant compared to the growth of free cash flow per share, which is the"profit" to be re-invested directly into new growth projects or growth-generating research and development projects.
For example Amazon's cloud services business is now a global market leader and its profit engine room ever since the CEO started shuffling free cash flow generated by the online retail business into this growth sector.
More broadly Australian retailers are now set for the Amazon treatment where they're forced to compete with a powerful rival willing to operate on razor-thin margins designed to plunder market share and build its network effect.
The good news for investors is that Amazon's arrival is now priced into the valuations of retailers like JB Hi-Fi and RCG Corp (the footwear retailer behind the Hype Dc and Athlete's Foot brands) that have shed 17% and 50% over the past year.
While the local retailers are also investing in their own online offerings and member loyalty schemes in an attempt to defend market share.
Once the uncertainty has blown over hindsight will show that there were some bargains and value traps across the Australian retail stock sector at the end of 2018, especially given the soft consumer confidence making for a tough retail environment.
So how do I profit from Amazon?
Often in investing it's best to focused on what won't change, rather than might change and the best way to profit from the Amazon launch remains to bet on the lead husky by opening an international brokerage account to buy the NASDAQ-listed Amazon stock that has climbed 405% and 1,349% over the past 5 and 10 years respectively. It sells for US$1,139 today and may thump the market in the decade ahead.
