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Of all the things I expected to hear from Benchmark Capital's Bill Gurley on the crisp, clear Silicon Valley morning that we met him, a pitch for a 10-year-old techie that's been accused of running a sweatshop wasn't one of them.

But that's what my Rule Breakers teammates and I got. Gurley bought (Nasdaq: AMZN  ) at close to today's prices because it trades as if investors assign zero value to the retailer's cloud computing business.

If he's right -- and I think he is -- that would be a huge mistake. Cloud computing is a nascent-yet-critical market that, so far as Microsoft's (Nasdaq: MSFT  ) Ray Ozzie is concerned, Amazon leads. "All of us are going to be standing on [Amazon's] shoulders," Ozzie said in October, at the launch of Mr. Softy's Windows Azure cloud environment.

Say no more, Mr. Ozzie. Amazon is my choice for the best stock of 2009.

Cloudy with a chance of billions
Whether it'll also be the choice of netizens isn't clear. But I'm not sure it has to be. IDC Research estimates that spending on cloud computing services will rise almost three-fold to $42 billion by 2012, a 27% compound annual growth rate.

"A recent IDC survey of IT executives, CIOs, and their line of business (LOB) colleagues shows that cloud services are 'crossing the chasm' and entering a period of widespread adoption," Frank Gens, senior vice president and chief analyst at IDC, said in October. "Moreover, IDC expects the cloud adoption trend to be amplified by the current financial crisis."

He's referring to small businesses with constrained budgets. For them, cloud computing's low upfront costs could allow for innovation on the cheap. Amazon believes it can court this crowd via its Elastic Compute Cloud (EC2) -- both here and in Europe.

Of course, Amazon isn't alone. Google (Nasdaq: GOOG  ) , (NYSE: CRM  ) , and NetSuite are pitching cloud-based productivity software. EMC (NYSE: EMC  ) is hoping clients will store data in its cloud. Apple has MobileMe. And finally there's Microsoft's Ozzie, who positions Azure as a massive cluster of processing horsepower and an alternative to EC2.

They're all in the right place at the right time. Pew Research published a report in September that says 69% of "online Americans" already use cloud computing services such as web mail, data storage, or productivity applications.

Sale in aisle @
So what makes Amazon special? Efficiency. Time and again, CEO Jeff Bezos and team have been able to create high returns on invested capital in a notoriously low-margin business:


Last 12 Months









Normalized net margin





Source: Capital IQ, a division of Standard & Poor's.

Some of that is due to Amazon's business model. Cash comes in the door before product is shipped out. But creativity also plays a role. Amazon is a heavy user of Twitter.

"I work at Amazon. During a lunch break last March I wrote a simple bot that posts Amazon's deal of the day to Twitter," wrote Fool j2xl in response my article about the rebellious micro-blogging service. "Since then I've added Lightning Deals throughout the day. The bot now has close to 3,000 bargain-hunting followers and drives all sorts of orders every day. Add it to the list of Twitter success stories."

I'll say -- @AmazonDeals has more than 3,300 followers on Twitter. We don't know much how much "all sorts" equals, but there are reports that Dell has grossed more than $1 million selling on Twitter. We also know that while Overstock (Nasdaq: OSTK  ) is on Twitter -- and extremely responsive, I might add -- eBay (Nasdaq: EBAY  ) isn't. And neither is selling the way Amazon is.

Creative e-tailer. Emerging cloud giant. Is there any stock better positioned for 2009 than Amazon? Not to this Fool. Click here to rate Amazon "outperform" in CAPS if you agree, or "underperform" if you disagree. And be sure to return next week when our editors reveal the Best Stock for 2009.

Amazon, Apple, and eBay are Stock Advisor selections. Microsoft and Dell are Inside Value picks. Google is a Rule Breakers recommendation. Try any of these market-beating services free for 30 days. There's no obligation to subscribe.

Fool contributor Tim Beyers is a member of the Rule Breakers team and had stock and options positions in Apple and Google at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy didn't sleep last night.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 18, 2008, at 1:18 PM, desurvivor wrote:

    I'm sure that all the millions and millions of people that are out of work in 2009 will just sit around their home computers and use their credit cards to buy items from Amazon, while their homes and cars are being repossessed. The only "cloud" hanging over Amazon is a black one!!!

  • Report this Comment On December 18, 2008, at 2:40 PM, echacha wrote:

    I wish you would back up the statement: "it trades as if investors assign zero value to the retailer's cloud computing business."

    A foward P/E of 35x assigns zero value to the cloud the business? Please Explain.

    What about GOOG? If anything it's the one not getting assigned any value for cloud with a P/E of 15.

    BOTH AMZN's ecommerce business and cloud computing opportunities more than adequately reflected in its current valuation.

  • Report this Comment On December 18, 2008, at 4:19 PM, TMFMileHigh wrote:

    Hello echacha. I believe that multiple is as it is because analysts are pricing in zero benefit from cloud services.

    Put it this way. According to its current price-to-sales ratio, $1 of Amazon revenue is worth $1.26 in market value. $0.11 of that is net cash. To me, this means that the growth potential of the cloud biz, as the market sees it today, is worth just $0.15 a share, assuming there's *zero* premium for Amazon's e-commerce operation. I don't think that's fair.

    FWIW and Foolish best,

    Tim (TMFMileHigh)

  • Report this Comment On December 18, 2008, at 6:28 PM, echacha wrote:

    Must be kidding me, you are mixing ratios: price to sales with a share based one.

    Plus your premise is backward. You should look at the separate businesses first, then apply the multiple. How do you know that the 1.26 p/s does not already reflect the growth of the ecommerce business and cloud opportunity? Most low ebit margin businesses (~5%) trade at well below 1x p/s. More like .3x to .5x. Now granted, AMZN is faster growing and is an ecommerce business, thus more scalable, but low margin businesses over time gravitate to p/s well below 1x.

    Anyway, P/S is probably not the best metric to use as AMZN does have earnings, is not a deep cyclical industrial and varying margin structures make comparisons difficult.

    Let's look at EBITDA:

    Consensus AMZN EBITDA est for 2009 is ~1500mm (And this assumes that estimate doesn't fall any further as it has been doing all year). Though 3% of AMZN sales is classified as other, I doubt it is profitable. Thus, it is entirely attributable to ecommerce.

    GOOG current EV/ 2009 EBITDA is 8x. Other Large Cap growth stocks are in that 8 to 10 range (AAPL 7.8x, ISRG 10.2x). Let's not forget, GOOG ALSO has Cloud initiatives.

    Let's say AMZN ecommerce is special so it deserves a (quite generous) premium to GOOG with a 10x multiple, despite similar growth rates and GOOG having more scalable model. .

    That gives you 10x1500mm=15,000mm EV

    Add back net cash to get equity value: 15000mm+2000mm=17000mm/440mm shares = $39 for the ecommerce biz.


  • Report this Comment On February 26, 2009, at 7:03 PM, imalost wrote:

    A retail stock selling for a PE of 45 with zero to negative growth in 2009 and a possible depression. HA HA HA, you must be joking. Amazon is so overvalued by any metric its pathetic. This company does not even report real earnings. Every quarter they come up with a trick to make the numbers, DVD unit sale,forex, lower tax rate. They guided down by as much as 37% in the first quarter, unemployment zooming and retail sales crashing and you would pay this kind of multiple for this company ? HA HA HA

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