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Tim Beyers and myself have been disagreeing a lot lately. We're Dueling Fools, taking opposing arguments on stocks and investing themes. This week, we're sitting on different sides of the debate between Amazon and Akamai.
Which online company is the better fit for your portfolio? More to the point, how can you not favor Amazon?
A la moat
At first glance, Akamai would seem to be the more formidable fortress. It created the content-delivery network niche that it continues to dominate. Amazon, on the other hand, is a store. Just another online retailer, with all its rivals only a click away.
However, take a closer look, and you'll realize that Amazon actually has the thicker moat. After all, every time an upstart content delivery network (CDN) launches a price war to gain ground, Akamai takes a hit. And when a tech bellwether -- like Amazon -- begins to build out its server farm, leading speculators to wonder whether of the big boys will start serving up third-party sites and media files … yep. Akamai takes a hit.
My fear -- one I'm hoping my friend Tim will help me conquer -- is that content delivery will become a commodity with razor-thin margins in a couple of years. Once everybody is on board, how can it not be?
On the other hand, Amazon has been successfully fending off the competition for more than a decade. There was a time when Wal-Mart (NYSE: WMT ) seemed like the heir apparent to e-tail. The world's largest chain had the inventory-turn mastery and mad data-crunching skills that would eat online retailers alive. Well, walmart.com is no dot-com slouch, but it's clearly no Amazon. Despite its ad in this year's Super Bowl, neither is bargain-hunting Overstock.com (Nasdaq: OSTK ) .
The secret sauce
How did Amazon manage to grow its sales by 18% during the same holiday quarter that found most online and offline concepts leaving lumps of coal in their shareholders' stockings?
Simple. Beyond aggressively broadening its storefront categories to cover nearly everything that you could possibly need, Amazon also made its site sticky with its Prime membership program. Shoppers pay $79 a year in exchange for free two-day shipping of all Amazon-stocked wares, or just $3.99 an item for overnight shipments.
That's perfect, since it makes the site even stickier. Can smaller sites clone the concept? Sure, but Amazon's network effect is already in place. As big as Amazon may seem to be, there's a reason why it continues to grow faster than the industry. The leader widens the gap between itself and the competition until that gap's nearly impossible to overcome.
Have e-tail margins been lean over the years? Sure. In the online realm of physical goods, they likely always will be. But who said that Amazon was limited by tangible merchandise?
Right now, the company's making inroads in the digital delivery of books, music, movies, and computer games. It can serve up a hot Hollywood release right into your TiVo (Nasdaq: TIVO ) , or load up your portable media player with your favorite music. That's a twofold win for Amazon; it can sell you both the media gadget and the media content.
Professor Plum with the Kindle-stick in the library
Digital books are a special passion for Amazon, especially since its e-tail roots are as an online rival to booksellers such as Barnes & Noble (NYSE: BKS ) . That matchup seems pretty laughable now, doesn't it?
Oprah Winfrey's not the only one wowed by the Kindle The company has put out three Kindle versions in less than two years, and it's established a juicy Kindle Store ecosystem. If perpetual gadget updates and a proprietary store sound familiar, you probably have Apple (Nasdaq: AAPL ) on the brain. The Kindle stands an excellent shot at becoming the iPod for book lovers -- which could make the Kindle Store the literary equivalent of the highly lucrative iTunes Store.
Unearthing the real value
Is Amazon trading at a higher earnings multiple than Akamai? Yes. Is it worth it? Definitely.
Just check out the growth. Analysts see Akamai's profits inching 2% higher this year and 5% next year. Amazon's earnings are expected to climb 9% this year, before catapulting 26% come 2010.
Along the way, Amazon shareholders can take comfort in knowing that their recession-tested company has proven its all-weather appeal. Akamai's version of "all weather" appeal is "whether" or not "all" of its rivals turn up at once, or gradually eat into the company's future prospects.
The choice is simple this week. Akamai is a quality company, but you probably want a little more Amazon in your life.
Make sure you check out Tim's argument for Akamai, then come back next Tuesday for our rebuttals.
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