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One Major Problem Amazon Must Fix

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When Amazon was trading at $700 in May of 2016, Rex Jacobsen told us The Market Is Underestimating Amazon and set a target price of $1,100. Nearly 2 years later, Amazon is at $1,500 and I have 8 managers who own it. But after listening to their arguments in favor of Amazon, there is still 1 thing that bothers me particularly now that the price-earnings ratio is 326; It is Amazon’s third-party sellers program.

When a stock is trading at 326 times earnings, it is vulnerable to corrections whenever there is disappointing news. So, if there is any part of the business that is not rock solid, it bears close scrutiny if you own the stock or thinking of buying it.

The New York Times estimates that third-party sellers account for nearly $8 billion, or 13% of Amazon’s total revenue in its most recent quarter and that it grew 42% from a year earlier. I believe this is a high-margin part of their business as the third-party sellers put up the capital for inventory and pay Amazon fees and a percentage of sales.

This is not so different from the business model of a retail mall. The stores in the mall pay the mall owner a percentage of their sales in addition to rent and other fees. This is a business model that has been successfully used over and over again.

However, a mall has a limited amount of space for stores. This makes the mall owner careful to select stores that do a good job for their customers so they attract more shoppers, making the mall more valuable for all the stores.

In contrast, Amazon has unlimited store space so they can say yes to everyone who wants to set up shop. And, they have said yes to some sketchy sellers.

In Amazon Offers LG’s 32-Inch IPS Monitor For $4.89, But I’m Not Buying It, I wrote about some of the sketchy deals I found on Amazon in March of 2017.

Since then, I have discussed the situation with Amazon representatives, and there have been improvements, but there is still a problem.

I no longer see third-party sellers offering deals that are too good to be true like the LG 32-inch monitor for $4.89.

However, there are plenty of “just launched” sellers with no ratings offering lower prices than other sellers including Amazon. Most of these sellers are no doubt legit. After all, every seller has to launch before customers can rate them. Nevertheless, I routinely pay a higher price to buy from either Amazon or a third-party seller with a track record, to avoid getting scammed.

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Article Credit: Forbes

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