Why I Would Buy Amazon Stock Today

Nov. 09, 2013 UPDATE: Since I wrote this post, Amazon is up 40%.

I wrote this opinion over on my Motley Fool CAPS profile, and feel strongly enough about it to share here.

Today, Amazon’s share price is about $258. It has a price-to-earnings (P/E) ratio of 316, which is enough to at least cause a second glace.

But there’s more to investing than a single metric, and I happen to believe AMZN has a long way to go before it hits its ceiling.

Here’s why:

Long term, they just have too much going on. Ignoring their hugely popular, widely successful cloud commuting enterprise, let’s consider online commerce alone.

US eComm sales totaled $194.3 billion in 2011. It’s expected to grow another 12-15% in 2012.

Guess who’s at the top of the heap (U.S.)? AMZN did $28.7B in online sales in 2011 – a 56% leap from year prior. Think they’ll do even better in 2012? You bet.

Online merchants are CONSTANTLY battling against the pricing on Amazon. If the merchant sells on Amazon, then they have to deal with price parity (meaning they can’t sell at a lower price on their own site than on AMZN).

Looking at that ever-growing pie of $194B and Amazon’s ever-growing slice of it, I can’t help but be amazed of their relatively low market cap.

Yes, they deal with pretty low margins in their online sales biz. Yes, they lose money on their shipping. Yep, P/E looks pretty steep, especially compared to Apple.

But then we can start to factor in the Kindle lineup (sold for losses) and how much that drives media sales ($17.7B). Then we can start to look at their cloud (~$1B revenue).

When I think about the future of the web and eCommerce especially, there’s no one (not even Wal-Mart) who is competing successfully across a given category. Sure, an individual item might be on sale at another retailer (eg: Best Buy (BBY) for a bit less, but the day-in, day-out pricing is where Amazon comes out ahead.

There’s even chatter about whether Google (GOOG) should be concerned for their search engine ad sales unit, since so many people make AMZN their first stop while shopping.

I think that’s getting a little ahead of ourselves, but it’s a conceivable notion: Google’s Adwords and Product Listing Ads are seeing sales slowing because of Amazon.

Globally, the 2011 eCommerce sales were at $961B. Amazon gets nearly 1/2 it’s revenue internationally. There’s a LOT of room to grow.

Right now AMZN is near it’s 52-week high. I’m utterly amazed by their business model, and think we’ll look back at this $116B market cap in 5 years and chuckle.

“Foolish” Question

I had someone ask me a question about whether I was saying I expect AMZN to have 1/2 of the global eComm revenue. For the record, I don’t think the question was foolish – but “Foolish”. It’s a slang thing for the Motley Fool site. :)

My answer:

No, I don’t think AMZN can achieve that level of international penetration. Chinese companies like Dangdang, Jingdong (360buy.com), and Alibaba will prevent any sort of widespread adoption in the largest eCommerce market over the next 20 years. That’s not to say Amazon.cn won’t contribute to their growth. It certainly will, and already has.

What I was saying about AMZN’s international sales is that those sales ALREADY account for 1/2 of Amazon’s total revenue. With global eCommerce sales continuing to grow at a rapid rate, the major players in the major markets (and emerging markets) should continue to see significant sales growth.

Furthermore, I suspect there will continue to be consolidation in the eCommerce space, as M&A becomes more common in eComm. AMZN is already one of the biggest players in this space, and I believe they’ll work aggressively to protect their business against competition.

If I’m missing something, I’d be happy to hear why you think I’m wrong about Amazon and their stock!

Disclosure: At the time of publication, I do not have any positions in any of the above-mentioned companies.

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