4 Big Reasons to Consider This Online Giant Now
Maxwell 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 currently trading around $236 per share with a price to earnings (P/E) ratio of over 2,700. Many commentators see Amazon as grossly overvalued. They believe there is way too much enthusiasm for Amazon's Kindle devices as well as the news surrounding Amazon's entrance into the cloud computing market. But one thing to remember is that Amazon should be trading at a very high premium - particularly against retailers that it is destroying right now. Neither Best Buy (NYSE: BBY) nor Barnes & Noble (NYSE: BKS) have a P/E, because neither is turning a profit. Both companies are struggling and neither will produce a profit at least for a year. Amazon is the main reason that both are struggling.
While Wal-Mart (NYSE: WMT) and Target (TGT) are in healthier positions relative to Best Buy and Barnes & Noble, I don't believe they will grow nearly as fast as Amazon going forward. So to compare the valuations of these three companies, one has to remember that Amazon is the one growing rapidly and taking advantage of technology, while Wal-Mart and Target remain primarily stable brick-and-mortar establishments with limited operations outside this traditional retail model.
What is more, Amazon has shown, during the last two decades, that it is well-equipped to navigate the turbulent online retail marketplace. It is arguably the most successful of the dot com businesses created in the 90s. While most of those business ventures tanked at the turn of the millennium, Amazon has thrived and sought new directions for the company. The fact that its management has done so well where so many have faltered is one of the main reasons I am still bullish on Amazon while many others feel the company is grossly overvalued. The CEO has been there from the start, and it's a case of if someone has proven themselves time after time then you must expect it to be done again. I expect Jeffrey Bezos to continue to navigate Amazon to new heights and feel the stock is a very good buy.
Here are the main reasons why I think Amazon is a stock to buy right now:
The Kindle has exceeded expectations
I was never very big on the Kindle idea, but then again I thought Apple's (NASDAQ: AAPL) iPad would be a dud. While Amazon does not release sales numbers for the device, it is very obviously an incredible success, and the only ebook reader that some compare to Apple's iPad. That is not a fair comparison, of course, but the company continues to upgrade the device that is starting to feel like it could be a very real competitor to Apple's device. What are the odds? I think it is not unlikely that Amazon is doing just that and any success would mean big things for both the company and its stock.
No company has come close to Amazon's E-commerce reach
Through its flag franchise (Amazon.com, and others) as well as its smaller franchises such as Zappos and smaller players, Amazon has been able to create a strong brand where an increasing number of consumers buy a big proportion of their online purchases. This is mostly because Amazon's distribution network around the world is second to none. That, along with a few other operational strengths, has given Amazon such an incredible advantage that giants such as Wal-Mart are not only being threatened but are falling further and further behind the curve. The company also listens to its customers in this field, having some of the highest customer satisfaction rates in the business.
Amazon excels at quickly adapting to new tendencies
Twenty years in a highly competitive online retail environment has enabled Amazon to adapt to new trends quickly. Its feedback/rating system was one of the first large scale rating systems on the web. Similarly, when Groupon started out with its daily deals, Amazon bought a big stake in LivingSocial. LivingSocial has transformed to become one of the bigger players in the industry.
It's not only shopping that is moving online
Data used by both individuals (files, music and video, etc.) and by corporations are increasingly being moved to the cloud. Amazon is considered by many to be the leader in the sector thanks to its AWS (Amazon Web Services) that is used by many of the internet's companies (such as Netflix (NFLX) for example). This is a fast growing field and Amazon is playing a leading role in its development. This area will provide significant growth opportunities for the company moving forward.
While there is no question that Amazon's P/E ratio is high-- and I can see why some would consider the company to be expensive. That being said, one of the things that Amazon has been very clear about in the past few quarters is why investing a lot into its infrastructure is critical right now. The company reported nearly 50% more revenues last quarter than in the same quarter the previous year. This revenue growth will continue far into the future. Profits will follow. The successful investor will remain patient with Amazon, in part because he or she knows of Amazon's proven track record.
Because of its huge base of customers and its reputation, Amazon could move into a lot of different segments and compete with companies like Apple, Netflix, or others. You cannot underestimate Amazon in any of these sectors. Even competing with Google (GOOG) for apps, data hosting and other areas seems possible. The company has been as solid as they come and expect more into the future. Investors should be very bullish on Amazon and not let a high P/E ratio deter them from enjoying its success.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Best Buy. Motley Fool newsletter services recommend Apple, Amazon.com, and Best Buy. 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.