Love Amazon But Hate Its Valuation? Gain Exposure With These 3 Stocks Instead
Joseph 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 great company, and I use their online store and services frequently. The stock is a different story. With a forward P/E of around 72, negative EPS robbing it of a P/E (TTM) ratio, and no dividend- it isn't exactly my kind of stock. I also realize that many look at the company's tremendous growth potential and are willing to pay for it: especially as a long-term investment. I have seen many an argument over the future of Amazon. While it is hard to invest in Amazon without buying Amazon, there are companies that help make up various components of Amazon's tablet/e-reader- the Kindle Fire HD. Without getting into the whole bear/bull case, these are some companies that may piggyback off the success of Amazon's Kindle tablet, giving investors who are weary of the stock's valuation an opportunity to get some exposure to the company with less risk.
Amazon's Kindle Fire, like many high-end tablets, utilizes Gorilla Glass manufactured by Corning (NYSE: GLW). For every Kindle produced, Corning makes the display glass. Corning is cheap with a P/E ratio of around 10.6 and even cheaper when considering its forward P/E ratio of only around 9.5. Corning has a solid balance sheet as well, with over $3 billion in cash when subtracting debt. Not only that, the company is also trading below its book value. How much cheaper can they get? As an incentive for patient investors, Corning also offers a dividend yield slightly above 3%.
The Kindle Fire runs on Android, the OS owned by Google. The default search engine, however, is powered by Microsoft (NASDAQ: MSFT). This directs mobile traffic away from Google search and into Microsoft Bing. Although users can technically switch search engines, most will likely decide to just use the default silk browser which uses Bing. This may also help open up Microsoft Bing to more third parties. Microsoft is currently priced at around 15 times earnings and pays a solid 3.4% yield.
The Kindle Fire HD is the first tablet to offer Premium sound provided by Dolby (NYSE: DLB). Amazon has incorporated Dolby Digital Plus sound into the Kindle Fire, giving it an edge in the audio quality department when compared to most other tablets. Dolby getting into tablets, and mobile devices period, is what they need for growth and continued relevance in the shifting technological landscape. The company is priced at around 14 times earnings, and is extremely strong financially with no debt and a current ratio of a little over 4.
Why the Kindle Fire?
The Kindle Fire may soon have its own currency- Amazon Coins. Not only is the digital currency a way to encourage developers, but it will also offer an easy way for customers to purchase apps, in-apps, and Kindle Fire games. According to Amazon's vice president of apps and games, Paul Ryder (in reference to Amazon Coins):
"Developers continue to report higher conversion rates on Amazon compared to other platforms... Now we have another new way to help developers reach even more of our millions of customers."
Amazon plans to initially give away "tens of millions of dollars" worth of free Amazon Coins to Kindle users. The company seems to be practicing their own form of "QE," by injecting capital into the hands of customers who will theoretically start spending it on Amazon items such as apps and games. This will attract developers if it works, because money should be flowing into apps with all the "free" money going around. If this increases the demand for Kindles, it should also benefit companies that make and create its components, as well.
The bottom line:
If you love Jeff Bezos, are confident about his strategy, and confident that Amazon will grow into its valuations and make a great long-term holding, then buy Amazon. If you are more skeptical on the stock because of its lofty valuations, but still bullish on the company overall- consider companies that manufacture or create components for Amazon's signature tablet, the Kindle Fire HD. You may not be getting the real Amazon, but you can get a little bit of exposure to the company by considering an investment in some of its key component partners.
All financial data obtained from Yahoo Finance
Jharry1 owns shares of Corning and Microsoft. The Motley Fool recommends Amazon.com, Corning, and Dolby Laboratories. The Motley Fool owns shares of Amazon.com, Corning, and Microsoft. 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!