What Do Amazon and Netflix Have? One Thing You Need to Know About Competitive Advantage

Competitive advantage: Often overlooked, frequently misunderstood, and generally underappreciated, it may be the most important factor investors should consider before taking a long-term stake in a company. In this video, Motley Fool Co-Founder and Chief Rule Breaker David Gardner presents three critical aspects of competitive advantage -- brand, distribution, and vision -- and looks at companies that possess them in spades

Back in the late 1990s, many people underestimated Amazon (Nasdaq: AMZN  ) , predicting that the company wouldn't last because anyone could come along and build a website that sold books and music. Boy, were they wrong. Similarly, these days, folks might not be seeing the competitive advantage held by online restaurant reservations company OpenTable (Nasdaq: OPEN  ) , which boasts an incredible, perhaps impenetrable, distribution network. And how about the vision of a company like Netflix (Nasdaq: NFLX  ) and its visionary leader, CEO Reed Hastings, who's been "skating to where the puck is going to be" for as long as critics have been writing off his company as a dead-in-the-water DVD-rental service. Each of these characteristics is essential to long-term business success, and each can be categorized under competitive advantage, one of the most important valued assets a company can have.

Watch the video below.

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OpenTable is a Motley Fool Rule Breakers pick. Amazon.com and Netflix are Motley Fool Stock Advisor recommendations. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 21, 2010, at 1:58 PM, Pandorabelle wrote:

    David, where is your foresight, i.e. "vision?" You absolutely MUST stop pushing NFLX if you want to maintain credibility. While (several years ago) it may have had the attributes you discuss in competitive advantage, all NFLX has left is the brand. It is a shell of a company that owns DVD's and leases the right to content---for which they can easily be outbid by any company with more MONEY.

    Here's a dose of vision: the days of DVD's by mail are few and numbered, and will give way to the streaming alternatives. As if that were not problem enough for NFLX, there have been massive insider sales at the executive level—NEVER a good sign, a whale of a bloated p/e, a tiny float that is manipulated daily by the Market Makers, institutions quietly selling off, subscription numbers inflated by freebies and other temporary promotional inducements....and next to NO cash on hand (or expected in the near term) to compete with the myriad of other deep-pocketed companies that can outbid them for content.

    Eventually people will stream from wherever they can get the best price--something NFLX will be unable to offer, as compared to giants like GOOG and AAPL. While the "net-neutrality" legislation may buy NFLX some time, this company is no longer a winning horse. Nothing about NFLX currently demonstrates vision, nor do you if you continue to promote this dinosaur. It is--at best--an acquisition target and I expect you to be responsible to your readers, to put aside the ego attached to your core holding recommendation agenda and acknowledge that, unlike AMZN, NFLX has precious little time left.

  • Report this Comment On November 21, 2010, at 3:22 PM, dgresl00 wrote:

    The only competitive advantage that Amazon had and still has is the lack of a sales tax on their products. They've had to resort to selling the Kindle (which they continue to play hide the ball on sales and profits) at cost to compete with the IPad. It trades at over 50x cash flow. They have a 4.5% operating margin and continue to overpay for businesses (Zappos and Diapers.com). This is a disaster waiting to happen at it's current valuation. Yes, I am short Amazon.

  • Report this Comment On November 22, 2010, at 7:55 AM, wb411 wrote:

    While I am not as long on NFLX as I am on AMZN, Vision is important, especially when it is accompanied by market share as both AMZN and NFLX have. In AMZN's case, their acquisition of Zappo's and Diapers are no different than what Apple, Google and Microsoft have been doing for years - which is buying other innovators, before they become real market threats. While AMZN's stock price may be high, I expect this year's holiday sales numbers will not be disappointing. Regarding NFLX, I do think their destiny is not as clear and suspect that they may become one of the overpriced acquisition targets for someone else - which is not such a bad ending to the great run that they have had..

  • Report this Comment On November 23, 2010, at 1:24 AM, TMFSpiffyPop wrote:

    Ironic in that NFLX spiffy-popped for us again the day after I wrote this article. I couldn't disagree more with Sundolly's comments (though thanks for contributing), and my money is where my mouth has been, and continues to be. And Amazon.com has many more competitive advantages than lack of sales tax -- this misguided thinking was in place back in the mid-1990's when we first recommended the stock -- I have learned and admired much since watching Amazon rise now to become a 53-bagger for us. I truly think you have your head buried in the sand if you're short Amazon with a conviction that it will cave in if/when sales tax is charged Amazon customers. The past 15 years of history is worth more than discovering their only competitive advantage is that. :)

    Foolishly,

    David

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