Amazon Busy Digging Its Own Grave

NEW YORK ( TheStreet) --'s ( AMZN) grand idea of putting large warehouses near population centers may sound good if you believe a move towards retail is a good idea.

What a deal changer in terms of the amount of time it takes to receive a product. Instead of three days, people will soon count on two, one, or maybe the Holy Grail in mail order, same-day delivery.

In order to lower the time between a customer pushing the "order submit" button and delivery, Amazon must sacrifice a portion of the efficiency that allows it to remain competitive against retail stores. Instead of focusing on costs, Amazon is moving closer to the retail model.

Is the retail or near-retail market really the place Amazon wants to go? Amazon must know the competitive landscape in retail is significantly different from mail order.

Best Buy's ( BBY) primary business model is retail, and we can see how that has worked against lower-cost online competitors Amazon and eBay ( EBAY). But is it only "showrooming" from Amazon's customers inside Best Buy that resulted in lower revenue and earnings for Best Buy? I believe Best Buy's greatest competitive environment is from other retailers, not Amazon.

Other stores appear to sell the same or similar products. Target ( TGT), Sears ( SHLD) and the retail elephant Walmart ( WMT) offer the lion's share of products available in Best Buy.

Instead of focusing on cost control, improving margins and remaining competitive on price, Amazon is counting on greater sales (and maybe earnings) from falling delivery times. Amazon is losing its greatest competitive advantage.

If you regularly buy products on eBay and Amazon, you know many of the products are offered by the same merchants and Amazon allows third-party sellers to list products.

What you may not know is that the selling fees for eBay average less than the selling fees on Amazon. This is why you may have found the same item sold by the same merchant for more on Amazon than on eBay. Amazon's merchant fees are gravy compared to selling its own products, and are needed to have an expansive inventory.

However, when checking the same merchant's price on eBay or the merchant's Web site is only a click away, the ability for Amazon to increase margins is naturally constrained. Why should Amazon investors anticipate higher share prices if product sales margins and merchant fees remain under pressure?

My good friend Rocco Pendola correctly pointed out in Apple Competes With Its Unwritten Future that investors of almost all timeframes have made money.

One very popular investing style that never appears to go out of fashion is the musical chair method. I refer to it as the Thanksgiving turkey theory of investing. If you read "Fooled by Randomness" and "The Black Swan" by Nassim Nicholas Taleb, you know how this investment thesis concludes.

Taleb brilliantly illustrates the potential error in assuming the future by using the past. Imagine a turkey on a farm and its relationship with the farmer. Each day the farmer comes to the turkey and brings the turkey food.

Each day the turkey grows to trust the farmer more than the last. There is no reason not to trust the farmer. After all, the farmer provides shelter, water and food. It doesn't take long for the turkey to view the farmer as its support and that the farmer will be there for him every day with more food and water.

This is the same as many investors and analysts view Amazon. They see the chart moving higher and higher and see no reason for it to stop. This, that and the other thing will happen, and everything is pointing towards a higher stock price.

In fact, if you had suggested a year ago that it was time to sell Amazon, look how foolish you would appear right now. The turkey feels the same way, and on the day before Thanksgiving the turkey trusts the farmer more than any other point.

It's the day the turkey holds the highest amount of trust that the farmer approaches with an axe instead of a daily ration of food. The incredibly fantastic share price leads me to believe that Amazon is either in or near its own November, otherwise I wouldn't sound the warning bells to be careful.

If you buy Amazon, you may want to keep an eye out for Walmart, Target and other retail giants to see if they turn into a farmer.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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