Amazon.com is the "go to" website for bargains on almost anything. At the moment, the retailers' own stock is a deal as well.
After getting beaten up following an earnings report, Amazon.com (AMZN, news) stock is trading about 15% below recent highs. To understand why that makes it a compelling buy, you need to consider what I will call the "forever clock rule."
This rule, espoused by Amazon founder Jeff Bezos, may sound whimsical, and not something to risk your hard-earned dollars on. But if you get this simple concept, you'll understand Amazon 100% better than the crowd in the market that dumped the stock last week.
Buy at these prices and you'll get:
● An early piece of the Fire, Amazon's soon-to-be hot gadget.
● A chance to make lots of money as the stock regains ground and keeps going.
● A lesson in why long-term thinking is as important in investing as it is in life.
If you believe in forever . . .
Michael Brush
Here's the idea. In a remote Texas mountain, Bezos is building a clock designed to last 10,000 years, at a cost of $42 million. His forever clock. (I wrote about it recently in "Billionaires chasing big, bold dreams.")
His point? He hopes the clock will teach people the value of long-term thinking.
This long-term approach, the forever clock rule, is the rule Bezos has used to run Amazon since he founded it in 1994. It explains why Amazon survived the tech bubble and went on to thrive while so many competitors blew up.
And it explains why investors dumping the stock were making a big mistake.
After all, they were upset that Amazon's operating margins tumbled almost 3 percentage points to 2.4%. But this wasn't bad news; it was good news. It was good news because of why margins fell. Amazon is investing heavily in its long-term future, pouring money into stuff like infrastructure, digital-content rights and new devices like the Kindle Fire tablet, due out Nov. 15. (Pre-orders are being taken now.)
"Amazon has always invested in infrastructure years in advance. And they were always criticized by analysts, and the analysts were always wrong," says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm.
Indeed, while other tech stocks shot up in the tech bubble and then flamed out, Amazon's stock is higher now than it was back then. It's also posting revenue growth of 39% a year. Why? It's because of the forever clock rule -- the willingness to sacrifice near-term profit margins for long-term dominance. This strategic thinking is why shortsighted investors were punishing Amazon stock.
Davidowitz says a key differentiator of most successful retailers, like Bezos, is that they believe market share comes first, over profit margins, at least in the near term. "I worked with (Wal-Mart Stores (WMT, news) founder) Sam Walton for 20 years and he never said, 'How much margin can we get?' He always said, 'How much business can we get?' He knew if he got the business the margin would follow."
OK, so what exactly is Amazon investing in? After all, companies make investments all the time, and a lot of them don't work out. Why should we think Amazon's big investments will pay off?
The short answer is that Amazon has a long history of making investments pay off for shareholders. I don't see any reason to think that's changed.
More specifically, Amazon is pouring money into everything from its order-fulfillment centers, data centers and video content, to basic research and development that will create the devices it needs to deal with big threats from Apple (AAPL, news) and others.
To simplify things, I'll break out the investment strategy into two areas, basic infrastructure, and dealing with the Apple threat.
Continued on the next page. Stocks mentioned: Barnes & Noble (BKS, news), Research In Motion (RIMM, news) and Netflix (NFLX, news).
