When it comes to e-commerce, the top-of-mind company is certainly Amazon.com (NASDAQ:AMZN), which has a market cap of nearly $80 billion. Last year, it posted a sizzling 40% increase in revenue to $34.2 billion and operating income came to $1.41 billion.
No doubt, investors have taken note. Over the past year, the shares of Amazon.com are up about 29%.
But what about the future? Can the stock keep up its winning ways? Here’s a look at the latest pros and cons:
Pros
Innovation. As companies get larger, it can be extremely tough to introduce new products. But this hasn’t been a problem for Amazon. The company has developed a thriving Internet hosting business (customers include the New York Times (NYSE:NYT) and the Washington Post (NYSE:WPO); the Kindle reading device (there are more ebooks sold than softcovers now); an Apple (NASDAQ:AAPL) iPhone app for comparison shopping; video streaming for Prime users; and a Google (NASDAQ:GOOG) Android app store.
In fact, this week Amazon.com launched its Cloud Drive, which allows its users to store music and other multimedia files. They can be accessed from the desktop as well as smartphones.
The Infrastructure. When Wal-Mart (NYSE:WMT) was growing quickly from the 1970s to the 1990s, a key competitive advantage was its sophisticated supply-chain system. And yes, Amazon also has a world-class back-end — in terms of its facilities and Internet platform. It means quicker shipments and higher inventory turnover, which boosts cash flows (keep in mind that Amazon.com generally gets paid before it needs to pay its vendors). It’s an advantage that is extremely expensive to replicate.
A Growth Story. According to a study from eMarketer, ecommerce in the US is expected to increase by 43.4% by 2015. The estimate is that over three-quarters of the Internet population will make purchases online. Of course, there will be strong growth in global markets as well. To this end, Amazon.com has been aggressive in making investments in countries in Europe and Asia. Some recent initiatives include Baby in France and Apparel in China.
Cons
Behind the Curve. Even with its strong innovation culture, Amazon still has many challenges in keeping up with new markets and approaches. For example, the sudden growth in social buying sites, like Groupon, has forced the company to scramble. As a result, Amazon has invested in a rival, Livingsocial.com. It’s inevitable that there will be other threats to confront, especially as Amazon moves into digital goods.
Managing Growth. So far, Amazon has done a good job dealing with the complications of adding new businesses and entering foreign markets. But this can be a tough juggling act. After all, Amazon has been ramping up its acquisitions and investments. No doubt, such things can easily turn into big problems.
Sales Tax. A key advantage for Amazon is that it doesn’t collect sales tax. That allows for lower prices, which is important since the company’s margins are already at rock-bottom levels. However, with the growing budget deficits in many states, there is a good chance there will be more focus on deriving revenue from e-commerce transactions. One way to do this is to impose charges on online affiliates, which are partner sites for Amazon. Already, there is pending legislation in California, Hawaii, New Mexico, Minnesota and Vermont. Interestingly enough, last year Texas presented a $269 million tax bill to Amazon.com.
Verdict
Amazon’s shares aren’t cheap, with a multiple of 69 times earnings. Then again, the price-to-sales ratio is a more reasonable 2.3 times.
As with any top company, there will usually be a premium. And in the case with Amazon.com, the company has incredibly strong barriers to entry that should last for many years. There is also $6 billion in the bank, which will be helpful in making more key investments. So as e-commerce continues its growth ramp, the verdict should favor the pros.
