Amazon: The 20 Year Old Who Hasn't Grown Up
Moustafa 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) has posted some impressive numbers during its most recent earnings report that sent its share price up 14%. The gain in share price has pushed the company's P/E ratio higher where it now resides in the three-digit territory. Amazon's profit margin on sales is a paltry 1% and that’s rounding up. The company is nearing the age where it can drink and vote but has no plans it seems to exit the growth phase of its life cycle. Those investors that feel its P/E ratio, profit margin and other similar metrics make the company grossly overvalued are missing one of the most potentially radical shifts in retail buying patterns this century.
The last time their was a radical shift in consumer behavior Sam Walton was building one of the most impressive retail chains from a one store location to a global behemoth that has been loved and hated worldwide. Wal-Mart (NYSE: WMT) offered consumers a one stop shop for most of their retail needs offering prices that could not be offered by its competitors. Astute investors whom bought into the business model have been handsomely rewarded over Wal-Mart's history leaving multiple heirs in the Walton family consistently in the Forbes list of the richest people in the world. The next great shift in retail spending is now upon us, and Amazon is providing consumers a Wal-Mart style one-stop shopping platform that no longer relies solely on book sales to drive revenue. Amazon sells everything now from shoes to electronics and is one of the major reasons Best Buy is in the dire financial shape that it finds itself now.
Amazon has even caused a shopping trend referred to as Show rooming where consumers go into a brick and mortar store to try on and experience the product only to return home to buy it through Amazon and get the best possible deal. The prices offered by Amazon have caused even the mighty low cost leader Wal-Mart to take notice. A friend of mine two years ago first alerted me to this trend when he would catch women in his ladies shoe store trying shoes on and taking pictures of them. He found this odd until one of his regular customers told him they were doing this to go home and purchase the shoes for a steep discount on Amazon. Though feeling his pain it alerted me to the potential of this retailer that was once known only as an online book retailer. Major booksellers have already experienced the disrupting force of Amazon and now this same force is being felt in all the retail channels that Amazon is entering.
Amazon Prime is a bundle of services whereby a customer can purchase free shipping for a set price over the year. This leads to multiple small orders as consumers don’t feel the sting of shipping charges eating into smaller purchases. These small purchases are low margin sales for Amazon, but they cause a stickiness factor that bring customers back again and again for repeat sales. The Kindle has been lauded as a potential threat to the iPad, but with its low cost and basic functionalities, I don't see it as direct competition for the iPad. I see the kindle as yet another product that causes users to come back to Amazon for their retail needs.
I don't see the high P/E as a sign the company is over valued but an indication the company is still growing. The low profit margin, which is several percentage points below that of Wal-Mart, also indicates that the company is still coming into its own. It’s a disrupter; Amazon shouldn’t be compared to other disrupters as it’s a unique company creating completely new shopping patterns throughout the world. Looking at disrupters in other industries and companies that were first movers like Google, Apple and Microsoft and comparing metrics in my opinion doesn’t serve Amazon justice. The company is creating a completely new customer experience while developing a market that was inexistent a decade ago.
Amazon is led by its founder Jeff Bezos whom in his mid 40`s and in great health is primed to be at the helm of the company for many more years. Amazon has a company culture of frugality where executives fly coach and Bezos is known for looking for anyway to cut costs. The company will be the cost leader in the retail space over the next decades. Amazon has been a darling of the Motley Fool for a very long time becoming a 10 bagger, and I don’t think we have seen the last time Amazon becomes a multi bagger. I for one missed the initial growth of Amazon but plan on getting on board for the next stage. Though some see the recent run up as a good time to cash out, I see this as proof that Amazon will continue to succeed. It reinforces the business model that Bezos has created and is as good a time as any to enter a position in Amazon for the long term. (I won’t purchase shares in Amazon until next Monday to observe the Fools rules) However, there might be some ups and down in the next couple of years as Amazon’s continues to grow and improve its services I see it growing its business and improving its margins going forward. It has continually proved its detractors wrong surviving the dot com bust and radical shifts in tech. I see Amazon as a long-term growth stock that will continue to grow moving forward.
mooseelz has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. 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.