Investing in Amazon

Amazon is a new economy company that has been around for years. Though some class it in the technology sector, and some still think of it as a bookstore, it is really the world’s largest on-line retailer. It succeeds in retail by delegating just about every task except advertising and delivery.

Book selling is hard, selling books on-line is harder, and since 1994 Amazon has excelled at both. It figured out how to simplify book buyer’s lives, making it easy for them to find what they wanted, get it fast, and get a good price. Yet Amazon is much more than a bookstore now. It has expanded to serve consumers, sellers, and enterprise.

It sells almost everything that is not perishable. It sells used books too, right beside the new copies, or rather it takes a cut from people with old books to sell, the way eBay (EBAY) does. Many people buy their health supplements through Amazon too, often at a better price than health retailer GNC (GNC) offers. Many of these customers subscribe, having supplements delivered monthly.

One little-known arm of Amazon is Mechanical Turk, mturk as users call it, which matches workers to online piecework tasks around the world. Amazon earns a small fee on each transaction.

Amazon’s Kindle Fire is a coveted gift this year. It will lead to repeated sales the way selling old-style cameras led to film sales and selling printers leads to ink sales. It too should be a continuing moneymaker for Amazon. The Kindle Fire now holds the second biggest market share among tablet computers, chasing the Apple (AAPL) iPad in a growing market.

The Amazon Prime membership is another brilliant idea. It persuades shoppers to spend now, in order to save later. A membership costs 79 dollars and entitles purchasers to free shipping all year, plus ultra cheap one-day shipping. This is similar to the arrangement that has been such a success for Costco (COST). The yearly fee goes right to the bottom line, while membership promotes shopper loyalty and motivates extra purchases.

Amazon doesn’t make or even sell most of the goods people buy through it. The company simply collects continuing fees for advertising, organizing, and perhaps handling each purchase. It also provides technology infrastructure that can support almost any business, on an Amazon website or a branded site custom made for the business.

Amazon is good at what it does, but investors know it. It has a P/E of 77, and a price to book of nearly twelve according to information at This means it’s an expensive stock by normal measures, one that may or may not be considered worth its price by the market. Amazon shares have climbed about 10% in the last twelve months.

Jeff Bezos, who started the company in 1994, is still the Chairman of the Board, President, and CEO. Amazon is his company, and depends upon his leadership.

At the earnings conference call in October, speakers were extremely positive, speaking of strong growth, including from the Kindle Fire. In the Q&A, Thomas Szkutak, CFO, said of the Kindle, “And we think about the economics of the Kindle business, we think about the totality. We think of the lifetime value of those devices. So we’re not just thinking about the economics of the device and the accessories. We’re thinking about the content. We are selling quite a bit of Special Offers devices which includes ads. We’re thinking about the advertisement and those Special Offers and those lifetime values.”
The call also mentioned, however that Amazon’s business is inherently susceptible to currency movements and world events. There is also the vexed question of sales taxes, which may or may not affect the bottom line. Future conference calls can be found here, on the Amazon site.

Amazon is expanding operations, moving into new businesses and improving the ones it has. It considers its main task to be customer satisfaction, and it seems to be on task. The company is spending on growth, and is getting it, including in China.