Invest Like Stewie Griffin…
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are countless articles on the Internet advocating words of wisdom from tremendous investors such as Warren Buffett, Peter Lynch and others. While these investing greats offer some tremendously good advice, I’m going to propose that you invest like a different “celebrity”… Stewie Griffin. Yes, the animated one-year old prodigy focused on taking over the world on the TV show Family Guy. Stewie's focus is not on the short term; instead, he is dedicated to developing all sorts of technology in his quest for world domination. You are probably asking how in the world this could possibly be relevant to investing, so here is a hint: one retailer recently spent $775 million to acquire a company that makes warehouse robots to aide its own quest for worldwide domination.
From Disruptive Bookseller to a Dominant Force in Retail
Amazon.com (NASDAQ: AMZN) first entered the world of online commerce in 1995, back in the days of the dial-up modem and pay-by-the-minute AOL subscriptions. Amazon.com’s CEO Jeff Bezos wrote a visionary letter to shareholders in 1997 discussing how the company could grow and reshape retailing and e-commerce. One by one, Amazon.com has successfully challenged brick and mortar retailers and come away victorious. This started with simply selling books, gaining share from entrenched competitors including Borders and Barnes & Noble (NYSE: BKS). Today, Borders is in bankruptcy while Barnes & Noble is incurring significant losses with no end in sight. Next, it was CDs, DVDs, software, consumer electronics and essentially anything else you can find at a Circuit City (remember them?) or Best Buy (NYSE: BBY). The 5-year chart comparing the performance of Amazon.com and Best Buy to the S&P 500 says it all:
Today, Amazon.com sells just about everything you can think of; in fact, Amazon.com has directly taken on every company in the top 25 retailers in the U.S. except for McDonald's and Yum! Brands. The results are equally impressive on the top line, with explosive growth that has driven Amazon.com’s revenues to $54 billion over the past twelve months and has increased revenues 29% year-over-year in the most recent quarter.
No End in Sight
In Bezos’ 2011 letter to shareholders, he still refers to today as “day 1” for Amazon.com. With a continued focus on the customer and a never-ending drive to grow and innovate, Bezos has transformed Amazon.com into far more than a retailer of physical goods. First and foremost, Amazon has become a dominant player in digital media, starting with the introduction of the wildly popular Kindle e-book reader in 2007 and then continuing with the 2011 debut of the media tablet Kindle Fire. Aside from competing with mighty Apple (NASDAQ: AAPL) and its popular hardware offerings, Amazon.com’s sale of digital books, music and video has become a formidable competitor to Apple’s iTunes store. Amazon even goes above and beyond Apple’s current offerings with the functionality of its Amazon Cloud Player and unlimited streaming via the Netflix-like Amazon Instant Video. Plus, Amazon.com's digital media is universally available on not only the Kindle, but also Apple's iOS devices and Google Android devices.
Despite its size, growth can be found everywhere at Amazon. In addition to the digital revolution the company has helped to create, the company is finding creative ways to attract and satisfy customers. On the consumer front, this can range from Amazon Local, a direct competitor to Groupon (NASDAQ: GRPN), to the delivery of groceries via Amazon.com’s Amazon Fresh pilot. Unlike Groupon though, Amazon.com's daily deal service serves as a loss leader to attract otherwise profitable customer relationships, rather than Groupon's extremely poor business model for standalone profitability. In addition to becoming a formidable competitor to companies like Staples in the corporate world, Amazon has also been a pioneer with its Amazon Web Services, a suite of cloud computing solutions that rival the offerings of companies including Raxspace Holdings, VMWare and others.
And the key to Amazon.com’s quest for world domination is that there is no sign of this dramatic growth slowing down anytime soon. The company continues to invest heavily in growth, both in infrastructure (including significant investment in 18 new distribution centers that will open this year and the $775 million acquisition of Kiva Systems) and new ways to make the customer experience better (new devices like the Kindle Fire, new services like Amazon Cloud Player, addition of streaming video titles to Amazon Prime, etc.).
In total, these initiatives improve the number of items customers can choose from, the speed at which they are delivered and create an increasingly sticky eco-system that attracts repeat customers. For example, Amazon Prime provides customers with unlimited free 2 day shipping on items sold by Amazon.com and also provides free access to a streaming library that is quickly becoming at least comparable to Netflix. At $79 per year, Amazon Prime is a fantastic value if you become a regular visitor to Amazon.com!
Worldwide Domination Does Not Come Cheap
The path to worldwide retail domination does not come without a price. Amazon has very tight margins when you factor in its low prices, free shipping and R&D expenses. So, the TTM P/E of 283 and forward P/E of 95 that you see on finance websites is not a mistake. Other standard financial metrics, including the roughly 2% free cash flow yield and P/S of almost 2 certainly qualify as “expensive” in the minds of most investors. However, these metrics are deflated since they include capital and operating costs incurred during the rapid expansion of Amazon.com’s infrastructure and workforce; as Amazon grows into this new capacity, earnings and cash flows will follow.
If today is “day 1” for Amazon, many industry experts believe that the company can grow to rival the revenues of worldwide leader Wal-Mart over the long term. If you study Amazon's growth trajectory and consider that continued 30% annual growth puts Amazon.com on pace to eclipse Wal-Mart as the largest retailer in the world in just eleven years. With this in mind, Amazon suddenly transitions from being wildly overpriced to an interesting investment idea.
BrewCrewFool owns shares of Amazon.com and Apple. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. Motley Fool newsletter services recommend Amazon.com and Apple. 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.