Amazon.com Inc. Remains Unquestionably Bullish

On Feb. 4, I recommended buying Amazon.com Inc. (AMZN) stock as a long-term play with very important short-term catalysts that were about to unfold.  The basis of the long term recommendation was the fact that I found in Amazon that elusive quality that I was taught to seek in business school a few decades ago: Strong, sustainable competitive advantages.

The analysis played out like clockwork: The catalysts started delivering their bonanza and the stock rallied some 36% in four months.  So, is it time to take profits or do we let it run?

Let’s reassess both the long-term and the short-term catalysts.

In the long-term side I see no reason to bail out:

Amazon continues not only to maintain a commanding lead in online retailing, but it keeps building on that lead.  The basis of such expansion resides in price, convenience and innovation.  Price has become a much more important variable to consumers in the recession and will continue to be important in the years ahead, as the battered consumer struggles to rebuild wealth lost in the housing and stock market blow-ups.

Given Amazon’s size, which gives the company inordinate economies of scale, and its sophisticated systems and distribution network, which allow it to capture such efficiencies, Amazon is virtually impossible for competitors to challenge on that front. Simply attempting to reinvent Amazon’s model and compete against it is a sure way to go bankrupt fast.  This sustainable competitive advantage is here to stay.  What’s more, it allows Amazon to keep expanding market share.
On the convenience front, Amazon again is unsurpassed.  Being able to very quickly find a variety of products online, complete a purchase in just one click (without paying sales taxes in most states), and then have your purchases delivered to your house by an increasingly efficient logistics system in the United States fulfills the initial premise on which the company was founded.

In addition, the growth in fiber-optic Internet connectivity makes shopping online much faster than it used to be.  And U.S. President Barack Obama’s plan to deliver high-speed Internet access to rural communities will only benefit Amazon further.

On the innovation front, Amazon consistently surprises. Our Feb. 4 article correctly speculated that the revelation of a new, revolutionary Kindle 2 was on the horizon.  Kindle sales shot through the roof.

I myself bought one, as I had speculated in the article and I was extremely pleased with the result.  I was able to buy the complete works of Charles Dickens for my 11-year old daughter for less than $5, if I recall correctly.  She has been devouring them ever since.  I also bought “The Art of War,” “The Federalist Papers,” a Bible and many other titles for a small fraction of what I would have paid for them in paperback.

In addition, when my daughter made a “mistake” (her words, not mine) and bought some titles using the Kindle 2 online that I did not authorize, Amazon quickly rebated the money with no questions asked. Also, at one point I made a mistake using it and could not see many of the titles that I had bought.  So I called them up late at night using their 800 number and they very quickly and courteously explained how to navigate back to them.  So, Amazon deserves big kudos for its technical support and customer service.  This is another sustainable competitive advantage that will continue delivering customer loyalty and its consequences will be sales and margin growth.

In addition to the success of the Kindle 2, Amazon topped itself.  It soon after launched the Kindle 3.  Now, I must confess that I had the typical buyer’s remorse, since the launch of the Kindle 3, which has a larger screen with better resolution. The fact that it also has and an even more incredible capacity made me wish I held back and bought the new, improved unit.

Also, Amazon is working together with six universities - including Princeton, where I live -to offer all the books that students require for their studies through the Kindle.  So instead of lugging a huge backpack around campus (short on backpack makers soon?), students are going to be carrying a 19-ounce, 10-inch ultra-slim device with up to 3,500 books, as well as music that can be downloaded in seconds from a free wireless connection and backed up instantaneously in Amazon’s servers at no additional cost.

Soon, I can see road warriors visiting clients carrying all of their product manuals in PDF form, and lawyers and other professionals being able to carry an entire library of reference books, as well as their own work in this compact device.

So I expect Kindle 2 and Kindle 3 to be hot items on the Christmas shopping season this year and to keep growing strongly, transforming the way in which people buy their books, magazines, study and carry reference material easily and cheaply on the road.

Finally, I have talked at length about “cloud computing.”   This new trend relies on people buying very cheap notebook computers with very fast Internet access and keeping their data and performing their computing on someone else’s servers.  The advantage here is that you own a much cheaper, simpler computer with very little software, and the data and software you do use is safeguarded and constantly updated by the professionals with ultra-sophisticated and efficient operations - like Amazon - for a reasonable monthly fee.

The trick for this to work, once more is to have high-speed Internet connectivity available nationwide, whether at home or in the office.  As these connectivity functions grow, cloud computing will thrive, taking Amazon to new, unforeseen heights.  But this is a longer-term proposition, much like online shopping took some time to really take off.

Hence, there are short-term catalysts for the upcoming Christmas season. And the long-term proposition for Amazon is unaltered, because all of its sustainable competitive advantages remain in place.

Recommendation:
If you are a long time holder, feel free to let your position in Amazon.com Inc. (AMZN) run and look for much higher prices in a few years.  If you are a short-term player, given the recent stock price rally, you might want to take some profits, based strictly on valuation.   Even though, I expect to see a positive earnings surprise this coming July 15, nobody ever got poorer by taking some profits.  You might want to wait until later in the year, closer to October and November, to add to your position in anticipation of a blowout Christmas surprise from this online retailer (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in Amazon.com Inc.

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