Resistance is Futile: Buy Amazon
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A few months ago, an LED on our refrigerator started flashing red to let us know that the filter for the ice-maker needed replacing. We went back to Lowe's where we had bought it, expecting to purchase a replacement. But alas, the refrigerator was all of three years old, things change, and Lowe's didn’t carry a replacement part. So what to do? Get online, and sure enough we found what we needed, at Amazon (NASDAQ: AMZN). I remember when Amazon only sold books.
Born in the the dot.com craze as Cadabra in 1994, it went online as Amazon.com, named after the biggest river in the world. Founder Jeff Bezos is focused on making his company, with its river of consumer products, the biggest in the world. He has always taken the long view, willing to forgo profits for an incremental increase in the volume of business. Starting with books, Amazon quickly expanded to movies, CDs, and then to everything imaginable, including refrigerator filters.
Amazon, of course, doesn’t have a bricks-and-mortar store where you can go and browse their goods. Instead, they have huge warehouses or “fulfillment centers” located near major airports equipped with sophisticated inventory systems where a small army of employees stuffs stuff into cardboard boxes to be shipped all over the world. Best Buy (NYSE: BBY) is often referred to as Amazon’s showroom, a characterization that surely must annoy Best Buy, which had hoped to dominate the big box electronics retailing space after the demise of Circuit City. Instead, it is struggling to survive Amazon’s online challenge.
Amazon has tremendous advantages. It doesn’t pay for retail space. For the most part, buyers don’t have to pay sales tax on Amazon’s goods. Amazon benefits from other companies’ advertising. And now that smart phones are everywhere, almost every retail shop is Amazon’s showroom, as a customer can quickly compare prices and order straight from her phone.
Amazon has revolutionized the book industry with its Kindle book reader, its first branded product, which now has competition from Barnes & Noble’s (NYSE: BKS) Nook and Apple’s iPad. But Amazon is still the leader in e-book sales, with 60% of the market. Amazon now sells more e-books than physical books, saving a few trees in the process. A recent lawsuit about e-book prices was settled to Amazon’s advantage, allowing it to continue its practice of undercutting competitors’ prices. The biggest loser in that deal is apt to be Barnes & Noble, which is bitterly complaining, as well as other sellers of physical books, who are already suffering. Borders filed for bankruptcy last year.
Amazon is looking to cut into Netflix’s market by offering videos for Microsoft’s Xbox 360 as well as for its own Kindle device. Netflix may be the next company left floundering in Amazon’s wake.
Amazon currently has fulfillment centers across North American, Europe, Japan and one in China. Where is Amazon going next? Rumor has it that Brazil is targeted, as Amazon has help wanted ads out in Sao Paulo. This seems like an obvious move, given South America’s higher growth rate. A loser in this case may be MercadoLibre (MELI), which combines aspects of Amazon and eBay (EBAY) in the Latino market. Unlike Amazon, however, it does not operate fulfillment centers, which may put it at a disadvantage when Amazon gets fully operational. Amazon also has advantages of scale and technology.
On a fundamental basis, it’s a little tough to make a bullish case for Amazon. After all, it is trading at a price to earnings ratio of almost 180, a price to tangible book ratio of 18 and a price to free cash flow of 85. It is richly valued, but then it has always been richly valued. It doesn’t currently pay a dividend.
On the positive side, it has a 5 year growth rate in revenues of 35%, not bad for a retailer, and earnings are expected to double next year to about $2.50 per share. With a market cap of $98 billion, it is comparable to Facebook on the first day of its IPO and is surely a better deal. Billionaire Ken Fisher has more than $500 million invested in the stock. Former Vice President Al Gore’s hedge fund initiated a brand new position in the stock during the first quarter.
The bullish case for Amazon is really a bet on Jeff Bezos and his management style. He is clearly out to take over the world, at least as far as retailing is concerned. Amazon is, like Apple, a locus of creative destruction, changing business models in whole industries, leaving behind it a string of bankrupt companies and broken dreams.
Buy Amazon. Its stock price is down a little from its 52-week high. Sure it’s expensive. But better to buy it here than wait a while and buy it higher.
This article is written by Steven Edwards and edited by Meena Krishnamsetty. Meena has a long position in Apple. The Motley Fool owns shares of Apple, Amazon.com, Best Buy, and Netflix. Motley Fool newsletter services recommend Amazon.com, Apple, 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. If you have questions about this post or the Fool’s blog network, click here for information.