I’ve written about Amazon dozens of times on this blog and will certainly keep trading it for long & short stock picks but despite my continued attempts to find a good buying opportunity as a long term speculative pick, I just don’t see it happening anytime soon. I admire almost everything about Amazon, and over the years have been gradually increasing the proportion of my spending that goes to the Bezos controlled conglomerate. Of course, most of that is irrelevant when I try to determine if I’ll buy a stock or not. Yes, using the service helps me understand it better and that makes it more likely that I will buy. But it’s certainly not enough for me to pull the trigger.

The Big Problem

If you’re Jeff Bezos, an Amazon employee or customer, you’ve gotta love what the company is doing. Every month, it spends hundreds of millions to improve its infrastructure, services and goods. Sometimes that means building a few warehouses, building a world class cloud infrastructure, starting new initiatives such as its new Fire Phone, or testing things like Amazon Fresh, etc. Amazon seems determined to keep reinvesting until it reaches that “critical” point.

What Is That Critical Point?

In the past few days, I’ve been thinking about one Amazon initiative that seems to give us a good look into what the company is trying to build; Amazon Fresh. The short story is that it is starting to offer grocery delivery. That makes sense in so many different ways. Groceries are one if not the most important retail sector and one that has seen little to no disruption from technology. Clearly, there is a big opportunity that several companies are looking to get into.

Instacart is a startup that makes it possible for customers to order grocery which can be purchased and delivered by personal shoppers who get paid to perform the service. It is the “Uber” of groceries. You can imagine that it is a challenge to get started such a service because you need to get both demand from customers but also people that will perform the task. It’s not easy to do both at the same time. Try finding customers when there is little to no service or getting “shoppers” when no orders are coming in. However, when it does work, the investment required is very small.

Amazon is approaching the problem in its usual way of course which means massive investments. Amazon is trying to build warehouses to store food, get orders that can be delivered either through its existing distribution or what Amazon has started; its own trucks. The cost of trying this in parts of Seattle are important but Amazon can clearly afford those. Can Amazon afford to build this across the country and around the world? Clearly not at this point. Yes, once that happens, Amazon would be able to get much higher margins, etc. How long could it take Amazon to get there assuming that is its intention? 10 years? 20 years? Longer?

How about same day delivery? Yes, drones might help at some point, but what is the shorter term goal? This story is repeating itself over and over. Yes, Amazon is slowly taking over the world. Sales continue to increase with no end in sight.

That is not translating into profits though as you’ve heard over and over:

Yes, Amazon is a low margin business and is never going to make 20-30% profit margins. There is a difference between 20-30% and 0% though…

The big issue here is not that Amazon can’t generate profits. I’m convinced it could decide to turn the switch at any moment. That is not what Jeff Bezos wants to do though. He’s probably right as well because while the internet isn’t a “one winner take all” game, it certainly is closer to that than what you’d see offline. Just look at what Amazon is able to pull off with its dominant book market share. But as long as Amazon is focused almost entirely on growing and improving its infrastructure, profits will remain close to $0. No matter how much faster sales increase, Bezos will simply use that money to grow everything else more quickly. With no end in sight, it could take several decades before Amazon can start reducing its infrastructure spending.

Can’t Blame Bezos

I’d probably be the last guy to blame Bezos. I think the main problem of most public companies and governments is there singular short term focus and if you’re using a 20-30 year horizon, sacrificing profitability in order to build what is already the top operation is likely worth it. At some point though, investors will get tired of the profits that never come. Amazon will likely be one of the hardest hit stocks the next time a stock market crash happens. That is exactly when I’ll get in. There’s more than enough time for that to happen, I’m guessing we’ll see a few crashes in the next 20-30 years!

Disclaimer: No positions on Amazon (AMZN)

As one of the key ecosystem players out there, Amazon ($AMZN) is in a position to launch products that can successfully compete against others out there mostly thanks to its existing infrastructure.  One of the key features that all ecosystems have or will end up battling for is payments. I don’t think I need to explain why. Payments are most likely the most lucrative business in a world where everything is going digital. It’s not clear if there will be one winner but in any case, even if it ends up being a world with several dominant players, it is an area that all ecosystem players will end up fighting for.

Yes, that means Amazon has a better shot at competing against established players such as eBay’s ($EBAY) Paypal but also newer players such as Stripe. Up to this point, Google has already worked on a solution (Google wallets) and Apple is rumoured to be working on a solution. Facebook ($FB), like Google has been trying but has not succeeded to this point. They each have their own unique advantages and for Amazon, one of they key aspects of course is its number of active customers that each have a current credit card on the system.

One Big Issue That Amazon Payments Needs To Address

Amazon is of course targeting 2 main types of payment customers; personal and businesses. Everything does look promising but one key missing feature is the lack of international support. I certainly understand that it will be a big challenge to quickly scale up in a world where each country has its own regulations and banks but it’s the only way that Amazon Payments can succeed. One of Paypal’s most important features is the fact that virtually everyone in the world can use it. In our inter-connected world, the majority of business and transactions are done internationally and it will be very difficult for businesses to justify moving to Amazon when they can only do a portion of their transactions.

Impact On The Stock

In the short term, there is no impact. We all knew that Amazon, like other ecosystem players would be launching a payments solution. I will however be closely following the progress of this platform and think that it could end up having a very significant impact on Amazon in the coming months/years. It is certainly positive for Amazon to come out with this launch so early and it gives

Disclosure: No position on Amazon (AMZN)