A Company On a Quest to Take Over the World

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Amazon.com (NASDAQ: AMZN) has been a controversial stock for years. While most investors acknowledge that its business model is excellent and agree that its leadership is visionary, there is dramatic disagreement on what the company's value should be. Despite trading at ridiculously high price to earnings and free cash flow yield multiples, the stock keeps surging upward as illustrated in this chart.

AMZN Total Return Price data by YCharts

After recently passing the $300 per share threshold for the first time in its history, it is a good time to take a step back and revisit why Amazon.com continues to defy investors' traditional focus on trailing valuation metrics.

Tremendous growth continues

As I've written at length in a series of ten blogs in the past year, Amazon.com is simultaneously disrupting a number of industries. Since the most recent of these blogs, Amazon.com has continued its heavy investment in a number of areas; here are just a few of the highlights:

These are just a handful of the headlines from the past quarter. The company also continues its rapid growth in a number of other ways. For example, Amazon Web Services, which reached $2 billion in revenue last year, has been projected to reach revenue of as high as $24 billion in the next decade; AWS' strong product portfolio and growth rates made one analyst project that AWS would be worth $19 billion as a standalone company earlier this year.  

On the consumer side, Amazon.com continues to attract customers thanks to its selection, prices, and the free shipping and online video streaming perks of its Amazon Prime service. The result: over 209 million active customers. Aside from customers coming back for repeat purchases, this tremendous base provides Amazon.com to grow revenue in areas that you may not expect; for example, Amazon.com is thought to be on track to exceed $800 million in advertising revenue during 2013.

Growth does not come without upfront costs

Amazon.com has spent over $4 billion in the past year on capital expenditures to support its rapid expansion of data centers and distribution centers around the world. While significant on its own, this $4 billion capital investment is only part of how Amazon.com is investing in future growth.

As I wrote back in January, it is critical to understand how Amazon.com is obsessively gaining market share and near-fanatic loyalty among customers as part of the company's long-term goal of creating an "enduring franchise." CEO Jeff Bezos has deliberately chosen not to raise prices and instead continues to create a value proposition that is too good for consumers to pass up, whether it be free shipping, free streaming video at par with Netflix (NASDAQ: NFLX), or offering Kindle Fire HD at half the price of Apple's iPad.

Brick and mortar retailers are not a valid comparison

While a part of the investment thesis in Amazon.com is its potential to surpass Wal-Mart (NYSE: WMT) as the world's largest retailer, this is only part of the story. Whether it is groceries, cloud computing, or streaming video, Amazon.com is a business like no other today; this uniqueness is only poised to grow in the next decade as the company continues to differentiate itself through heavy investment in a broad range of diverse businesses.

The stock chart above should illustrate just how different Amazon.com is compared to big box retailers, but to reinforce the point, here is a comparison of Amazon.com's growth rates compared to peers in various businesses that the company operates:

 AMZNWMTTGTMAAPLRAXNFLX
Revenue growth - past 5 years 31.3% 3.9% 2.7% 1.9% 42.5% 25.4% 25.7%
TTM price to sales ratio 2.2 0.5 0.6 0.7 2.4 4.4 4.0
Source: Motley Fool CAPS - July 20, 2013

The contrast should be apparent. Amazon.com's top line growth is ten times its brick and mortar competitors like Wal-Mart. So, is a price to sales ratio that is four times higher than these retail peers really that unreasonable? In contrast, Amazon.com's price to sales ratio seem very reasonable compared to device manufacturers, cloud computing, and streaming video peers .

Competition is literally everywhere

It is important to note that Amazon.com's competitors will not go down without a fight. For example, Wal-Mart has turned its attention to improving its website and e-commerce fulfillment operations. If Wal-Mart can leverage a strong omni-channel strategy, it has the ability to slow Amazon.com's steady market share gains. Omni-channel will be an especially important focus for Wal-Mart going forward, given that the ability to pick up items instantly in-store will remain a competitive advantage for the foreseeable future.

On the device front, Amazon.com is by no means the front runner in the tablet market; Apple has roughly ten times Amazon.com's market share of the tablet market and has an unparalleled track record of innovation. While rumors are nothing new to Apple's highly-followed product development, details regarding both smaller and larger iPad and iPhone models appear to be gaining momentum from reliable sources.

If the iPad Mini is just the first in a series of products designed to address a larger percentage of the mobile market (and multiple price points), Amazon.com may no longer enjoy a significant edge in pricing that has helped it gain a foothold in the tablet market.

As a pure-play provider of video (streaming and by mail), Netflix is clearly "all in" with its strategy of providing a tremendous video library at a low monthly fee; with 36 million streaming subscribers and a head start with award-winning original content such as House of Cards, Netflix will remain a formidable competitor as well.

Given how aggressive Amazon.com has been in content acquisition (both for unlimited Prime Instant Video and pay-per-view formats), Netflix will need to continue to find ways to differentiate itself through original series and international expansion in order to drive growth. Monitoring the company's commentary on the success of these original series will be an important (albeit qualitative) insight into this competition.

These are just a few of the competitors looking to thwart Amazon.com's growth ambitions. Competitors ranging from grocery stores to cloud computing providers, such as Rackspace Hosting, are threatened by Amazon.com's current growth trajectory. It will be important to monitor the competitive environment in each of these areas (and others).

Amazon.com continues to take over the world

Analysts expect Amazon.com to continue to grow revenue by over 20% annually going forward. Looking out five to ten years, there is little doubt that Amazon.com will continue this growth trend and be even more dominant than it currently is. At that time, management can begin to truly leverage the position it has built to ramp up profitability. At that time, $300 per share will seem like a bargain. For this reason, Amazon.com remains a solid investment opportunity for the long-term.

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Brian Shaw owns shares of Netflix and Amazon.com. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com and Netflix. 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!

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