The Bull Case for Amazon
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Amazon (NASDAQ: AMZN) is a very particular investment case -- the company has been losing profitability and could even report negative earnings figures in the following quarters. In spite of that, shares of the online retailer are trading at a stratospheric valuation, with a P/E ratio above 190. On this basis, a lot of opposition has been growing regarding the merits of investing in Amazon.
By traditional metrics, Amazon doesn't look like a convenient investment -- other technology leaders Apple (NASDAQ: AAPL) and eBay (NASDAQ: EBAY) look much better in terms of valuation and profit margins. In the retail sector, companies like Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) offer both higher profit margins and a much lower valuation too.
But Amazon is not a pure tech company or a simple retailer; it is transforming retail by changing the way we shop. And it's doing so in a tremendously effective way; the company focuses on delivering a growing assortment of products at low prices, and does it while improving the quality of the service in terms of the shopping platform and delivery speed.
Amazon is focused on building an indisputable leadership position and it doesn't regret losing short-term profitability to achieve that ambitious target. From the company's shareholder letter in 1997: "We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."
Revenues have not only increased dramatically over the last years, sales growth has also been accelerating due to intelligent initiatives like increasing product assortment, introducing third-party sellers into the platform and launching new business lines like cloud services.
Amazon's competitive strength is nothing short of amazing. As the company sells more products it has the possibility to spread its fixed costs into a bigger amount of items, and that makes it almost impossible for new entrants to compete efficiently. The company is building distribution centers all over the country in order to increase its efficiency in logistics, which is another factor setting it apart from potential competitors.
There is a virtuous cycle of growth relating to the company and its industry -- as Amazon includes more products and faster delivery, customers have a more compelling reasons to choose online shopping versus traditional brick and mortar stores. Amazon has become the de facto place for online shopping, and that increases its reputation and trustworthiness among customers.
Amazon has convinced many people to choose online versus brick and mortar when it comes to shopping and younger generations will find this new paradigm much easier to assimilate.
Amazon is investing heavily in increasing delivery speed at extraordinarily low costs, an innovation that could provide an invaluable edge in the competitive fight versus traditional retailers. Walking out of the store with the purchased item in your hand is clearly more satisfactory than having to wait for home delivery. By decreasing the wait time, Amazon is eroding one of the last advantages brick and mortar stores have over the online retailer.
Even better, the time issue is not only related to waiting for the product. We are all very busy nowadays and time is one of the scarcest and most valuable things we have. Instead of having to go to a store, wait in line, etc., Amazon gives us the possibility to make a purchase with a few clicks and spend that extra time in more important or pleasurable activities. Having to wait for delivery may be worth it if we consider the extra time online shopping frees, especially with the delivery times getting shorter by the day.
Value investors, those who like seeing the price of a stock sustained by current earnings or cash flows, should probably stay away from Amazon, as the company will likely keep reinvesting heavily for growth over the next several years. But make no mistake, this is a disruptive company with an almost indestructible competitive advantage and tremendous growth prospects. If you like that kind of business, maybe you should forget about valuations and go with Amazon anyway.
acardenal owns shares of Apple and Amazon. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Amazon.com, Apple, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.