Amazon's cart is getting bigger as the company wants to compete in the travel space. This would position the e-Commerce giant against companies like Expedia, The Priceline Group and Booking.com that already specialize in exactly that.
The Motley Fool's Brian Nichols took a look into the news and suggests that Amazon's move into the travel space is more than just another service on the site. This may be the next step in Amazon attempting to boost it's much needed e-Commerce profits to offset its struggling operating margin that's left some investors questioning their stake. Amazon Travel, which rolls out next year to selected cities, will collect a fee from hotels on what it displays on its own site. While margins would be somewhere in the ballpark (15 percent) of Expedia (11 percent) and Priceline (36 percent), according to the report, Amazon's edge comes with payments.
"Two of the more lucrative industries that Amazon.com is attempting to monetize are payments and advertising. While the online and mobile payments industry is becoming more crowded by the day, Amazon.com's large user base of 250 million plus gives it a platform to be highly successful in payments," Nichols wrote.
Amazon Travel may be aligned with the goals of its other recent initiatives into the payments space.
"Now, the company is rolling out new services like bill payment options, mobile payments, credit card readers, and a brick-and-mortar payment processing service called Local Register. In essence, Amazon.com is trying to replicate PayPal's business, which had an operating margin of 24 percent last year. Given Amazon.com's current operating margin, PayPal is not a bad business to replicate. Then, Amazon.com has many options to explore in the payments industry, those that aren't so crowded, like Visa and Mastercard's business, which carry even higher margins."
Amazon has faced criticism for pricey investments where payoff has yet to be seen, but this could be a step forward for Amazon.
"With all things considered, it appears that Amazon.com is trying to use its large network to incorporate multiple high margin services," Nichols wrote. "The silver lining is that Amazon.com does have opportunities like payments, advertising, and now travel, which are historically high margin businesses that all translate well to a high consumer traffic website like Amazon.com's. Theoretically, even if the company can create $2 billion in revenue annually, collectively, from these new services, with a 20 percent operating margin, Amazon.com could create $400 million in operating profit."
"That's many times higher than the company's creating right now with $85 billion in trailing 12-month sales, and might just be enough to push the stock higher long-term. Therefore, satisfying Wall Street while letting CEO Jeff Bezos continue his pricey, yet effective growth strategy," Nichols concluded.
Let's hope for Bezos' sake this is his silver lining.