It’s funny how quickly we can sometimes drastically change our minds. About 2 years ago, I was very bearish on Amazon, on its business and on the Kindle in particular. I could not have been more wrong and thankfully I did end up having a change of heart about the Seattle based company quickly enough to not short Amazon in recent months. In fact, Amazon was one of my 4 stock picks for our yearly stock picking competition (results for Q3 will be announced next week) That was certainly a good thing. Despite a big drop in August, Amazon’s stock continues to rise quickly. Why? The numbers don’t lie. I think Amazon is one of the best tech investment opportunities out there these days. Limited downside and a lot of upside. What more could you ask for?
Here are the main reasons why I think Amazon is a stock to buy right now:
–Kindle: As I said, I once was very negative about the Kindle. While sales numbers for the device are not being disclosed, it is an incredible success and the only ebook reader that has picked up to the point where some compare it to Apple’s iPad. That is not a fair comparison of course but rumors are very strong that Amazon will be releasing an upgraded and enhanced version that could mean real competition for Apple. What are the odds? Probably bigger than you could imagine and any success would mean big things for both the company and its stock.
–Amazon = ecommerce?: No company has taken ecommerce even close to Amazon’s reach. Through its flag franchise (Amazon.com, and others) as well as its smaller franchises such as Zappos and smaller players, Amazon has been able to create a strong brand where an increasing number of consumers buy a big proportion of their online purchases. Why? Mostly because Amazon’s distribution network around the world is second to none. That and a few other operational strengths has given Amazon such an incredible advantage that huge companies such as Walmart (WMT) are starting to feel threatened.
–Amazon Is Willing To Experiment: One thing that Amazon has been very good at is quickly adapting to new tendencies. Its feedback/ratings system is in many ways one of the first large scale social websites on the web. In a similar way, when Groupon started out with its daily deals, Amazon bought a big stake in LivingSocial, put energy into it that has now taken LivingSocial to become one of the two big companies in the field.
–Cloud Computing: It’s not only shopping that is moving online. Data used by both individuals (files, music and video, etc) and by corporations are increasingly being moved to the clouds and in that sector, Amazon is considered by many to be the leader thanks to its AWS (Amazon Web Services), that is used by many of the internet’s companies (such as Netflix for example).
–Valuation: There is no question, Amazon’s P/E ratio is high and I can see why some would consider the company to be expensive. It generated $2.28 in earnings per share in the past year, making its current price very expensive. That being said, I think one of the things that Amazon has been very clear about in the past few quarters is why they feel like investing a lot into their infrastructure is critical right now. The company reported nearly 50% more revenues last quarter than in the same quarter the previous year. I do expect that tendence to easily keep up for some time. Will profits follow? To some extent but I am personally willing to be very patient with Amazon.
Amazon revenue growth chart from ycharts.com
–Endless possibilities: Because of its huge base of customers and its reputation, Amazon could move into a lot of different segments and compete with companies like Apple, Netflix or others. I don’t think anyone would underestimate Amazon in those sectors. Even competing with Google for apps, data hosting and other areas seems possible.
Disclosure: No position on Amazon (AMZON) at this point