Portfolio X-Ray: Amazon.com

Note: Read this introduction to see what I am doing in this series.

About Amazon.com
Amazon.com (Nasdaq: AMZN) is pretty well known, so I’m not going to go into much deyail about what they do. The company went online in 1995, primarily as a retailer of books. They managed to survive the dot-com bubble, a time when every company that had something to do with the internet, or technology in general, was experiencing sky high valuations. Amazon emerged relatively unscathed, and even benefited a bit from the failure of a lot of fly-by-night internet retailers, the most famous perhaps being Pets.com. As if led by the will of its founder and CEO Jeff Bezos, Amazon emerged triumphant, and gradually morphed into the mega-online retailer it is today, mostly by acquiring other successful online retailers like Zappos. Now Amazon is often viewed as a one-stop shop for most items, and truly changed the way that many retailers viewed the internet.

In it’s own words, Amazon keeps what it is and what it does simple:

Amazon.com opened its virtual doors on the World Wide Web in July 1995 and offers Earth’s Biggest Selection. We seek to be Earth’s most customer-centric company for four primary customer sets: consumers, sellers, enterprises, and content creators. In addition, we provide services, such as advertising services and co-branded credit card agreements.

It goes on further to differentiate among these customer sets and what products and services it provides for each. Consumers are the life blood of the company, buying millions of unique items every day. Amazon also provides sellers with a marketplace, similar to eBay (Nasdaq: EBAY), and allows them to use the Amazon fulfillment network. Enterprise customers can utilize Amazon Web Services to assist in the technology needs of their businesses, while content creators can independently publish their works through various methods provided by Amazon and its resources.

Why I Invested
I actually considered Amazon last spring, but decided to pass then for various reasons. Since then, Amazon shares have appreciated just over 23%, making my decision look foolish in retrospect. Nevertheless, I decided to invest in the company a few months ago, with the hope of not missing out on similar gains going forward.

As with most retailers, Amazon is squeezed by margins as it attempts to compete on price with traditional brick-and-mortar retailers. Shrinking margins, as well as the company’s focus on other long-term growth strategies, has led to quarterly losses in two of the last four quarters, with another loss expected in the third quarter as well. Therefore, traditional evaluation metrics often make the stock look overpriced, and many folks are hesitant to invest in a company that is experiencing losses every other quarter.

As indicated above, however, there is more to the company than the retail operations. Amazon Web Services uses one of the top supercomputers in the world to provide the infrastructure to a lot of websites and other businesses that you probably use on a regular basis. Though the Amazon Prime video offerings often replicate what is found on Netflix (Nasdaq: NFLX), free two-day shipping almost makes up for it, allowing customers to receive most of what they order expediently. It may not replace the immediacy of purchasing something from a local retailer, but with the further investment in the company’s distribution network, the delivery time is getting shorter and shorter.

When I would Sell
Amazon currently seems like a company that will dominate for years, but it is not guaranteed. While I can appreciate the current investment in company infrastructure, my patience could begin to run thin should it continue much beyond the next three years. Another problem facing the company is the potential of sales tax affecting future income. Currently, Amazon charges sales tax on items sold to customers in only 10 states: Arizona, California, Kansas, Kentucky, New Jersey, New York, North Dakota, Pennsylvania, Texas, and Washington.

There has been a push recently, mostly by the other states that are missing out on tax revenue, to have Amazon — and its customers — pay sales tax on items purchased. Not only will this require Amazon to spend more money, but it could impact sales because they might no longer have the lowest price available when sales tax is considered. This is an interesting development that bears watching over the next few years, mostly to see if Amazon can adjust to the changes required.

Until next time…

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