It’s Time to Double Down on this Tech Innovator

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

About a month and a half ago I decided to add shares of Amazon (NASDAQ: AMZN) to my virtual “No Drip, No Mess” portfolio.  Since then, shares are down more than 17% as investors have cooled off on the tech innovator.  It hasn’t helped that a bevy of new tablet devices have hit the market and the company issued rather weak fourth quarter guidance.

I think the dip represents a nice buying opportunity, and that’s why I want to double down on shares for my virtual portfolio.  While shares still aren't exactly cheap, given the short and long term prospects of the company I want to add to my position before the market wakes up and realizes what lies ahead.  I see three future catalysts that should drive shares higher.

Holiday Sales Could Actually Be Good

For the past few years we’ve been waiting for the Christmas that consumers finally open up their wallets and starts spending some money. Despite the fiscal cliff fears, this could be the Christmas Santa finally delivers.  We should know a bit more on this within the next two weeks, but any hint that this won’t be a blue Christmas could put a spark under shares of Amazon.

Cheap Kindle Could Be a Giant Killer

Having spent a lot of time around screaming kids of late, I’ve had plenty of time to watch them interact with tablet devices.  Even the youngest among them have been easily entertained (and educated) by these devices, and I think families are going to be putting plenty of them under the tree this year. 

The field is crowded with Google’s (NASDAQ: GOOG) Nexus 7 (starting at $199), Apple’s (NASDAQ: AAPL) iPad products (starting at $329) and Microsoft’s (NASDAQ: MSFT) new Surface (starting at $499), as well as Amazon’s Kindle Fire (starting at $159).  However, the price points for multi-kid families show two viable options in the Nexus and the Fire.  If the family already owns a Kindle product, it raises the odds that they’ll choose a Fire, especially when they can buy two for the price of one iPad 2.  That could yield big holiday sales, which will yield bigger recurring revenue for Amazon. 

The field will continue to crowd over the years as each company rolls out new upgrades and price points.  However, Amazon has made it a point to sacrifice margins, as CEO Jeff Bezos has gone so far to say: "We want to make money when people use our devices, not when they buy our devices."  That business model puts Microsoft and especially Apple squarely in their cross-hairs; it's a game of wits they very well could win.

Still in the Early Stages

Amazon started as an online book seller, and now they make the devices that someday will replace the need for bound books.  That innovation is unlikely to be their last, and they have several hidden cash machines that could turn out to be big drivers of the stock.

That being said, there is a lot of room for growth within their massive addressable market.  Of the $4 trillion we spend each year on retail sales, just $200 billion of that is spent online.  Moreover, of Amazon’s $50 billion in sales, a large chunk is coming from outside the US.  They have decades to grow both in expanding their market share online as well as converting more offline sales to their platform. 

Risks and Why I’d Sell

Amazon is not a cheap stock by any means, and they have made it well known that they are sacrificing present day margins for future profits.  That strategy isn’t one that will appeal to all investors and is one that has its share of detractors

Amazon trades at an eye popping price-to-earnings ratio and more than 50 times cash flow, meaning there is a lot of growth priced into the stock.  If Amazon’s e-commerce growth slows or sales of their Kindle devices start to fall off, it could have devastating effects on the company’s share price.  If that happens and they begin to show signs that their business has significantly deteriorated, it could be time to sell.

Bottom Line

While I don’t like the price, I do like the long term story, which is why I’m adding to my virtual Amazon position.  As part of my risk management strategy, I view Amazon as a “no mess” company, meaning that because I don’t want the company’s risk to mess up my portfolio, I’m only investing income the portfolio has generated to buy shares.  Specifically, I’ll be using income from dividends and options generated by the portfolio to buy just two shares, which will bring my allocation up to 1%.

I think that over time I’ll be well rewarded by not reinvesting that income back where it came, but instead using it to buy this great long term growth company.  I’m not calling a bottom in Amazon’s shares or saying that it’s a screaming buy.  I just think that the sell-off is a nice doubling down point that represents a fair price to pay for this great company. 


latimerburned owns shares of Apple and has the following options: Apple and Microsoft. The Motley Fool owns shares of Apple, Amazon.com, Google, and Microsoft. Motley Fool newsletter services recommend Apple, Amazon.com, Google, 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!

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