Amazon's Tipping Point

NEW YORK (TheStreet) -- There's a major theme in the first 23 days of 2014: retail disruption.

The lead article on today is a story we've seen in different iterations since the calendar turned. Today it's titled "It's Black Friday Again! Retail Woes as Deep as the Discounts." Retail continues to offer unprecedented discounts, even as steep as Black Friday discounts, but nobody is shopping.

Six days ago the Wall Street Journal published a piece, "Stores Confront New World of Reduced Shopper Traffic," indicating a permanent shift is underway. Macy's recently announced plans to lay off 2,500 employees and close 5 stores this spring. Lululemon cut its quarterly outlook because of weak January sales. Best Buy lost 28% of its market cap in a single day after reporting lackluster holiday sales.

What's going on? With GDP growing and the economic recovery underway, it should have been a strong holiday quarter for retail. But it wasn't. And the stock market isn't happy. The market has been running in circles without going anywhere, and the Dow Jones Industrial Average is down 379 points (2.29%) year to date.

As Apple (AAPL) investors, we've been frustrated by the lack of a pre-earnings run, but the truth is that no stock has gotten a pre-earnings run.

What gives?

There's a chance that the answer to this question will be revealed on Jan. 30. There's a chance that a tipping point of massive proportions is underway, a tipping point being led by a single company. That company is Amazon (AMZN).

Amazon reports earnings on Jan. 30, and it's possible the report will shock and awe. Without knowing the exact results, we do know that Amazon had to limit new Prime memberships to 1 million during the third week of December to be able to fulfill its orders. (The $79 Prime membership provides unlimited free two-day shipping). Even this self imposed limit on Prime memberships wasn't enough to get all the packages shipped in time for Christmas, which resulted in some unhappy customers.

We also know that Amazon set a record with 36.8 million items ordered on Cyber Monday, a healthy 39% higher than last year's peak day due to a consumer shift toward smartphone shopping. That is boosting Amazon sales. More than half of Amazon customers "showroomed" in bricks-and-mortar stores and then clicked on their smartphones to purchase via Amazon.

Amazon's low overhead costs compared to its retail peers are proving to be too much for the competition to bear. Amazon has 88,600 employees, compared to Wal-Mart's (WMT) 2.2 million employees. This structural advantage has enabled Amazon to disrupt the retail industry on an Apple-esque scale. Remember the collateral damage that Apple inflicted on its competitors? Over the first 23 days of 2014, it's looking like a similar trend might be underway because of Amazon.

The vast majority of Wall Street analysts, including us, have dismissed Amazon's business model as unsustainable because the company isn't profitable. That could change in 2014. If it does, Amazon is poised to go on a fast and furious rise from $400 to $1,000, as the bears throw in the towel and respect Amazon's disruptive dominance.

It's important to note that everything we've said about Amazon is also true about Alibaba in China. If Amazon can go to $1,000, it means Yahoo! (YHOO) can go to $100.

Our epiphany on Amazon is coming late. Nevertheless, it could be argued that the stock run over the past five years has been "tough money" in the absence of profitability. The massive investment Amazon has made in infrastructure could be on the verge of wiping out traditional retail. We'll get more clarity on Jan. 30.

In terms of stock action, Amazon hasn't gotten a pre-earnings run. It closed at $395 on Dec. 18 and has hovered near that level over the past month of trading. This earnings report is worthy of a "flyer" position, similar to how we'll handle Apple. If Amazon delivers, the portfolio will have AAA status. 

Apple is the innovator. Amazon is the disruptor. And Alibaba will be the IPO of 2014.

Here is a roundup of articles on Amazon's disruptive power.

At the time of publication, the author was long on AAPL but held no positions in any of the other stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jason Schwarz is an option strategist for Lone Peak Asset Management in Westlake Village, Calif. He is also the founder of the popular investment newsletter available at Over the past few years, Schwarz has gained acclaim for his market calls on the price of oil, Bank of America, Apple, E*Trade, and his precision investing in S&P 500 option LEAPS. His book, The Alpha Hunter, is available from McGraw Hill.

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