The Future Is Still Bright for Amazon
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Investors in Amazon (NASDAQ: AMZN) have not been deterred by the extremely high P/E ratio (even ratios based on future earnings) and the high share price relative to book value. Instead, the focus is on the fact that Amazon is the most successful of the dot-com companies and has enormous room to grow compared to its competitors. The following are reasons I believe that Amazon, even trading around $300 per share, remains a buy.
Undisputed king of online retail
Online retail continues to grow and analysts predict close to double digit growth into the foreseeable future. Amazon leads the way among online retailers. While Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) are solid investments, the growth in retail is found online. Neither company is going to lose its position as one of the top two retailers anytime soon, but they have not been much competition to Amazon in the online landscape.
Amazon generates roughly $65 billion a year in online sales; Wal-Mart sits at under $10 billion, while Target sits around $2 billion. But the giant retailers do appear to be improving their e-commerce presence. Target is seeing mobile sales increase well over 100% year-over-year. Wal-Mart is expecting double digit e-commerce growth for 2014. This is good news for both companies, as both will need to have a solid footing in online retail in order to see good overall growth going forward.
Wal-Mart expects growth to come from its recent dynamic pricing plan. The company is not intent on aligning e-commerce prices with in-store prices, but rather pricing that best competes with online retailers, particularly Amazon. The company is also in the process of increasing its online product offering. These steps will result in further growth in e-commerce for the company.
Target has made efforts to grow its e-commerce footprint by focusing on mobile users. The company is working on an image recognition feature that would pull up detailed information about a product when a customer captures an image on her phone. It also recently partnered with Facebook to offer Cartwheel, which offers customers in-store discounts.
While Target has partnered with Google to offer same day delivery services, the company appears more focused on using technology to drive customers into their stores and make the shopping experience faster and easier.
Success of Kindle will bring more customers
The Kindle has been a huge success. The move towards mobile devices has and will continue to propel Amazon. The company has taken an e-book reader and turned it into a bona fide competitor to the Apple iPad. Amazon now has one of the most popular mobile devices in the world. The success of the Kindle will fuel more web traffic to Amazon’s store, resulting in increased revenue.
Barnes & Noble’s (NYSE: BKS) Nook device has been effectively killed by the Kindle. The ease with which the Kindle dominated the Nook speaks volumes about Amazon’s ability to succeed in the online retail market and competitive mobile device market. It also can serve as a cautionary tale to other largely brick-and-mortar enterprises. While Barnes & Noble might survive despite the ultimate fate of its Nook device, it seems clear that it is not going to be able to compete head-on with Amazon anytime soon.
The best chance Barnes & Noble has is to figure out some way that its physical bookstores and Nook e-book business can feed off each other. If Barnes & Noble has an advantage over Amazon, it is its physical stores. The company took steps to make the Nook more competitive by allowing users to access the Google app store, something Amazon doesn't allow on the Kindle. Perhaps the company sees a benefit in turning the Nook into an e-reader that is also a low-priced Android tablet.
Amazon Web Services huge growth potential
While Amazon has focused on cash flow with its retail segment, it has been turning solid profits in its cloud computing segment – Amazon Web Service. Earlier this year, it was estimated that this segment’s stand-alone value is $19 billion. It will see revenue growth of almost 50% this year. What's more, the growth potential in this segment appears to be as good as that of the company’s online retail arm.
While Amazon is the leader in enterprise cloud services, there are potential pitfalls for the company. Some critics point out that Amazon’s lead in the field is driven primarily by cost as opposed to reliability and ease of use. If a cloud enterprise company like Google (NASDAQ: GOOG), for instance, can make its enterprise price structure more competitive and compete with Amazon on ease of use, then Amazon’s lead in the field would be in jeopardy.
Google is trying to compete with Amazon on price by offering sub-hour billing increments down to one minute intervals. Along with offering smaller instances for low workloads, Google might be trying to carve out a niche for smaller and mid-size users of enterprise services. This is smart, given that Amazon appears to be second-to-none for large scale enterprise clients.
But Google has a long road to toll if it wishes to take on Amazon. While Amazon has been criticized for some service issues, the company is so far ahead of any potential competitors that it is almost a case of too-little-too-late for Google and others.
I understand why investors might be put off by Amazon. Earnings are nowhere near in-line with the price of the stock, shares trade at too high a premium over book value, and the company may seem too concerned with cash flow at the expense of profit. But for those investors who believe that we are still in in the Internet’s infancy, Amazon makes a great investment. There is no other company around that comes close to its dominance in the online retail world or its enterprise cloud systems. These areas are primed for incredible growth in the next few years.
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William Alder has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Google. The Motley Fool owns shares of Amazon.com and Google. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!