Google Wallet is an Amazon Like Service With Low Margins
Google (NASDAQ:GOOG) isn’t quite done with its e-commerce initiatives yet. It seems the search giant is now in negotiations with major retailers and shippers to provide an online marketplace, taking Amazon (NASDAQ:AMZN) head on. [1] If Google’s service manages to launch, it would directly compete against Amazon Prime, which provides customers free & quick shipping for a fixed annual fee. Given the spate of new initiatives at Google, we believe Wallet will be a little more difficult to tackle and question whether or not Google has the stomach to be in a business that could be very difficult given Amazon’s experience in this arena.
See our full analysis for Google’s stock
Executing an Amazon-Like Model is a Significant Challenge
After launching its mobile payment platform Google Wallet, as well as its daily deals product Google Offers, it is not a big surprise that Google has jumped onto the remaining major segment in the e-commerce market, which is online shopping. However, Google should be aware that a company like Amazon runs on razor-thin operating margins. Amazon’s operating margin for Q3 2011 was less than 2%. [2] The e-commerce giant has taken years to streamline its business model, after being written-off by many critics during its initial years.
Additionally, it seems that Google is in hurry to do almost “everything” on the web. Their recent products have been more reactive than proactive, with Google Wallet chasing after PayPal, and Google Offers following daily deal sites like Groupon and LivingSocial.
While Google has a comfortable cash cushion to invest in these ventures, the company must realize that these sectors go beyond just technology, with expertise required in managing retailer/customer relationships, as well as handling sales reps in a brick-and-mortar setup. With Google already competing fiercely with Apple (NASDAQ:AAPL) and Facebook in the mobile and social space, it raises the question whether the company should continue to invest in a host of ventures that are beyond its forte.
We currently have a price estimate near $628 for Google’s stock, which is in line with the current market price.
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