4 Reasons Amazon.com Will Rule the World

Shares of Amazon.com (Nasdaq: AMZN  ) soared nearly 8% higher yesterday, fueled by a Goldman Sachs analyst upgrade.

Upgrading a retailer at a time when consumer discretionary-spending trends are coming under pressure is risky, but Amazon isn't just any retailer.

The country's leading online retailer has been doing a lot of things right lately, and Goldman Sachs' James Mitchell thinks that the future will only get better for Amazon. He sees sales growing at an annualized clip of more than 20% over the next decade. The buy rating on Goldman's conviction list pegs a $98 price target on the stock.

Mitchell is right. Amazon is a special kind of company. Let's go over a few reasons why it's better to bet on the leading e-tailer than against it.

1. Retail's weakness is Amazon's gain
Amazon Prime is addictive, but shoppers don't realize it immediately. Paying $79 a share for unlimited two-day shipping or subsidized overnight deliveries may seem like a high price hurdle at first. However, like warehouse club memberships, mail-order DVD rental subscriptions, or satellite radio, it becomes an indispensable resource once you try it.

You're hooked. It's not just the great prices, potential sales-tax breaks, or convenience of front-porch deliveries. In these days of $4-a-gallon gas -- and climbing -- it's getting that much harder to justify a trek out to the shopping mall.

In other words, the very dynamics of the real-world marketplace are driving consumers online.

What will this mean for bricks-and-mortar chains? Their costs continue to escalate. Wages go up. Distribution costs are climbing. The same can be said for online retailers, but as shoppers migrate to virtual malls, real-world tenants -- and their tight-fisted landlords -- will have to compensate for the lower sales by raising prices at the worst possible time.

In other words, there will be a shakeout of physical retailers. Mitchell singles that out, suggesting that the reduction of offline retail capacity will send even more buyers to Amazon and its peers.

2. Amazon is a triple threat in digital delivery
A decade ago, Amazon was a great place to shop for media like books, CDs, and DVDs. Over the past year, the company has beefed up its presence in selling online books, MP3 downloads, and digitally delivered flicks and television shows.

With more than 120,000 titles available for its proprietary Kindle reader, Amazon now runs the world's largest e-books store. On the music front, Amazon recently lapped Wal-Mart (NYSE: WMT  ) to become the country's second-largest seller of music files. Even if it never comes close to Apple (Nasdaq: AAPL  ) , this is a silver medal to be proud of.

When it comes to serving up movies and premium television shows, Amazon is way behind Apple and the pay-per-view functionality of cable providers. However, Amazon Unbox did raise the bar last year when it offered to deliver movie purchases and rentals directly into TiVo (Nasdaq: TIVO  ) hard drives.

Delivering all three of the major media categories online can do wonders for a company's margins. As long as the content providers play along -- which they will, in time, once they realize the benefits of inventory-free distribution -- Amazon's margins should widen.

In other words, if you think growing sales at a 20% clip over the next 10 years is a good thing, picture profits growing even faster.

3. Nobody knows their customers like Amazon
Have you ever walked into a department store or consumer-electronics superstore and been approached by a friendly salesperson who knows just what you may want to buy next? Of course not. Unless you have a shopping list stapled to your forehead, old-school retail fails in this area, no matter how helpful the front line may be in terms of service.

Amazon is a data-munching master. It knows what you've bought and what you like, and it can compare that to its deep pool of performance data to recommend things that people like you have warmed up to.

Some companies specialize in niche areas. Netflix’s (Nasdaq: NFLX  ) recommendations get better the more movies you rate. Online music services like Napster (Nasdaq: NAPS  ) , Pandora, and Apple's iTunes may help you unearth your next favorite song. However, Amazon is the one that puts it all together by offering the deep dive through all retail categories.

As Amazon grows, so will its ability to know you even better.

4. Compounding magic is Amazon's friend
Let's put Mitchell's 20% clip in action. Net sales clocked in at $14.84 billion last year. If Amazon's top line grows at a 20% rate, we're talking about nearly $92 billion come 2017. And keep in mind that Mitchell sees that as the floor. If Amazon is able to grow at a 25% annualized rate, we would be looking at $138 billion in net sales in nine years.

I already touched on how earnings may grow even faster, given Amazon's higher-margin growth initiatives. Amazon commands a $35 billion market cap today. How much higher could it get if things go well?

Before you answer that, let's go over the growth rate in general. As companies mature, their growth rates slow. Right? Well, have you seen what Amazon has been up to in recent quarters?

Amazon.com

Sales Growth (YOY)

Q1 2006

+20%

Q2 2006

+22%

Q3 2006

+24%

Q4 2006

+34%

Q1 2007

+32%

Q2 2007

+35%

Q3 2007

+41%

Q4 2007

+42%

Q1 2008

+37%

No one is suggesting that the accelerating growth trend will continue forever. However, you have to go back all the way to just before the dot-com bubble burst in 2000 to find the last time that the company was growing as quickly as it has in recent quarters.

Today's levels may be unsustainable, but projecting 20% growth smells brutally conservative, especially as many of the other factors that I've spelled out come into play.

World? Meet Amazon. Amazon? I trust that you already know the world.

You’re not out of the Amazon jungle yet:

Amazon, Netflix, and Apple have been recommended to Motley Fool Stock Advisor newsletter subscribers. Wal-Mart is an Inside Value stock pick. Read up to learn why with a free 30-day trial subscription.

Longtime Fool contributor Rick Munarriz has been shopping online for about as long as Amazon.com has been in business. He does own shares in Netflix and TiVo. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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