Amazon’s Long-Term Future Warrants a Near-Term Buy

by Marc Bastow | August 30, 2012 2:30 pm

I can’t figure out what to make of Amazon (NASDAQ:AMZN[1]), and it’s driving me a little crazy.

Consider what Amazon has become since founder Jeff Bezos launched the company in 1994: the largest e-tailer on earth, one of the largest cloud-computing providers in the world, probably the largest online library and maybe the next version of a future U.S. Post Office model.

Still, “big” sounds good, but it doesn’t equal a great investment going forward. To figure out whether you should buy into Amazon, we need to do a little digging.

First, full disclosure: I previously owned AMZN shares but ran out of patience and was scared off by its dizzying P/E. That was roughly $100 per share ago. Now I’m taking a second look.

InvestorPlace Editor Jeff Reeves likes to talk about Amazon as a retail company[2] — and indeed, at its heart, it’s just that. AMZN has taken the e-tail model and slowly eroded an entire industry: brick-and-mortar retail. Target (NYSE:TGT[3]), Best Buy (NYSE:BBY[4]), you name it, the lot widely has been negatively impacted by Amazon’s ability to showroom[5] — where people view products in a competitor’s physical store, then go home and buy them from their computers, usually for a lower cost. I literally can’t think of anything you can’t find or buy off the Internet, and most of that can be ordered from and shipped by Amazon.

Speaking of shipping, how about Amazon’s Prime (two-day delivery) service? It was rolled out in 2005, and has grown so dramatically that Amazon recently announced it ships more items under Prime — which costs money — than it does under its free standard delivery service. People are paying Amazon for faster delivery, and who can blame them? It’s a get-it-to-me-faster world. Now, Amazon is trying to join eBay (NASDAQ:EBAY[6]) in exploring how to make same-day delivery a reality.

Ever heard of Amazon Web Services? Maybe not, but I assure you that data about whatever you bought and had delivered via Amazon in the past five years is housed in its AWS servers. An excellent New York Times article[7] by Quentin Hardy suggests that AWS is changing the face of the cloud as Amazon compiles uncalculable amounts of data stored on innumerable numbers of servers housed in the U.S, Japan, Ireland, Singapore and Brazil.

The AWS model is fighting among the giants of cloud purveyors[8], including specialized suites like VMware (NYSE:VMW[9]) as well as broader tech players like Microsoft (NASDAQ:MSFT[10]). But Amazon is, in the words of an industry insider, “killing it” in the cloud space. AWS “started” in 2006, and today brings in an estimated $1 billion in revenue (though for perspective, that’s still only about 2% of total revenues).

More than 185 U.S. agencies run on some part of AWS, and that number is expected to grow. And according to Hardy, “people in Africa shop for cars online, using cheap smartphones connected to A.W.S. servers located in California and Ireland.”

Oh yes, this is going to get bigger.

The Kindle might not have started the online reading world — thanks, Barnes & Noble (NYSE:BKS[11]) — but it imitation is the sincerest form of flattery, it started a compliment revolution. Amazon has taken the Kindle and run wild with it, allowing readers to flow in books, magazines, newspapers, newsletters and blogs for your reading pleasure at any time, and with the advent of the Kindle Fire, you get all of that, plus the whole Internet to play with.

Kindle’s “lending library” contains 180,000 titles — not quite as many as the 53 million listings in the New York Public Library, but you’ll save cab fare. And by the way, Amazon’s “Prime Instant Video” service claims 22,000 titles in case you can’t find anything to read.

Amazon hasn’t lost a nickel in the past five years on an annual basis, although Amazon has telegraphed a possible net operating loss for Q3 2012 on lower revenues. Between 2007 and 2010, revenue grew 224% while net income increased 142% before a slip (and my mini-panic) in 2011. Nothing major, just some increases in cost of goods sold. The balance sheet has $5 billion in cash and no long-term debt, and cash flow is around $3 billion.

The stock’s valuation remains a thing of lunacy at 300 times trailing earnings — not that Amazon’s valuation has really deterred the stock[12] — and, hey, it’s almost breaking down into double digits looking forward!

And it’s about the future, isn’t it? Amazon might not end up finishing the 5 billion things it starts, but it probably will lead in the few things it finishes.

So what am I waiting for? Well, a dividend, perhaps. Some sort of income would be nice to cushion a down year … but let’s face it: You get into AMZN for growth.

In that case, all I might be looking for is another pullback.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he is long MSFT and AAPL.

Endnotes:
  1. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  2. as a retail company: http://investorplace.com/2012/07/how-amazon-com-will-kill-costco/
  3. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  4. BBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BBY
  5. Amazon’s ability to showroom: http://investorplace.com/2012/05/why-best-buy-should-follow-targets-kindle-kibosh/
  6. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY
  7. excellent New York Times article: http://www.nytimes.com/2012/08/28/technology/active-in-cloud-amazon-reshapes-computing.html?_r=1
  8. giants of cloud purveyors: http://investorplace.com/2012/08/3-real-deal-cloud-companies-to-buy/
  9. VMW: http://studio-5.financialcontent.com/investplace/quote?Symbol=VMW
  10. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  11. BKS: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKS
  12. not that Amazon’s valuation has really deterred the stock: http://investorplace.com/2012/05/yes-amazon-is-overvalued-so/

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