11/1/2011 7:28 PM ET|
Is Amazon about to catch fire?
Investors have punished the online retailer for investing in its future, making the stock look like a bargain. Particularly since projects like the Fire tablet are about to start paying off.
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 . . .
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.
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Great column! I have had serious discussions with friends about why I think Apple will fade (Cook is a manager, not an inspired leader like Jobs) and Google will have serious issues ahead (they own marketshare but not content, and no consumer will pay Google directly for what they have always given away for free).
I shop - a lot. Always have, probably always will, and have the money to do it even in these uncertain days. The Net is my preferred method to shop, and Amazon is THE first place I turn to. I have not been in a mall in two decades. Yup, I'm Amazon Prime and it's worth every penny to me. These days less than 30% of my orders with Amazon are books; the remainder are Marketplace orders.
I have a lot of Millennial friends. Some use Apple, some don't; but every one of them uses Google and Amazon. The Netflix debacle has many of them seriously considering signing up for Prime to see if they can drop their Netflix and cable accounts. Amazon was smart - no, brilliant - to design better ways to sell content and get their fees from both consumer and vendor. Bezos is the real genius, not Jobs....oh, and he's a better manager than Jobs was, too.
for billcccc please learn to spell---in 3rd grade you learned to drop the y and add ed the word it TRIED not tryed even at the bottom of the post there is a check spelling use it.
to RPM---umm you pay the sales tax not the store, and since Amazon is in many different states which one should they pay sales tax on? and if they want they could just move to South Dakota or another state that does not have sales tax.
trkntrlman---if you buy something from Wal-Mart or a local store and you open it up and find it used you would get into you car and drive yourself to the store to return it, you would not demand a new one until you return the used one....Amazon is just like a store return it then you will get your new one.
Man I think Amazon is a great company I buy there all the time wish I had the money to buy enough of their stock to matter but 200+ is a little rich for my blood I mean 100 shares is 20,000 dollars I have to work with smaller dollars than that. For instance how about Spanish Broadcasting Systems. SBSA with a P/E of 1.43 Beta of 1.21 and earnings per share of $0.72...whats not to like? A Hispanic media and entertainment company which owns and operates 21 radio stations in New York, Los Angeles, Miami, Chicago, San Francisco and Puerto Rico. SBSA is based in Coconut Grove Florida and also owns 2 T.V. stations reaching 5.6 million people. This stock is currently selling for around a dollar a share. Earnings of 72 cents a share! Thats what gets me. Better than lots of stocks I've looked at. An undescovered gem if ever I saw one. By the way they have been around since 1983 and the 52 week high was $12.00. Check it out for yourself!
Sales Tax ! Ah Yes. Arizona like 22 other states is requiring (2011 is the first year in Arizona) that you report and pay sales taxes on your online purchases ~ on your individual income tax return! Amazon has reversed its position regarding a national solution to this sales tax issue (looks like they are going to eventually charge, collect and remit sales tax ~ they are looking to profit by charging a fee for performing the sales tax compliance for all the smaller companies selling on Amazon).
From an investors standpoint ~ this cannot help Amazon sales. Imagine the shock customers will have when they complete their state individual income tax returns and realize they owe sales tax on their Amazon purchases. This will probably help the Wal-Marts all the way down to the local merchants as it levels the playing field.
If Amazon continues to not back there buyers, and allows their seller to get away with selling Used Items as new, they won't last to long. I purchased a NEW item from the seller and Received a used one . when confronted the seller agreed to Send me a new item along with an RMA and return postage...I'm still waiting for my new Item. When I receive it He will get the old one back...
But he refuses to send the new Item, after agreeing to do it..
Amazon refuses to honor their guarantee unless i return the Item, thus leaving me in the cold, they screwed me once, not again...They need to send a new Item.... More proof that the internet will give you the shaft, if your not careful... Amazon could care less, they just want the bucks......
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