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My Money Is On This Hot Internet Company

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Today I'm going to tell you about an Internet superpower that, within the next two months, I'll be buying into with $4,000 of my own money. I'm so confident that my pick will outperform the market that if I sell any shares within the next three years, I'll donate $100 to charity.

This is the sixth article in a series that I'm writing about my retirement portfolio, which I'm dubbing "The Cheesehead Portfolio" in honor of my home state of Wisconsin. If you wish to see my first five selections for the portfolio, check them out:

Three years from now, I fully expect today's pick, Amazon (Nasdaq: AMZN  ) , to handily trounce the market because of its growing list of competitive advantages.

The key to greatness: enduring competitive advantages
When it comes to the investment world, we should always be looking for companies that have enduring competitive advantages. Such advantages can keep competitors at bay for decades while returning superior returns for investors. Amazon has four competitive advantages that will give it the upper hand for years to come.

According to Interbrand's 2010 report, the companies with the greatest brands out there include Coca-Cola (NYSE: KO  ) , Intel (Nasdaq: INTC  ) , and General Electric (NYSE: GE  ) . Although Amazon has a much more modest ranking at No. 36 globally, there are no e-tailers that rank above it.

That means when it comes to online shopping, Amazon is positioned in our brains to be the option of choice. Best of all, thanks to consumer-focused products such as the Kindle, its brand value continues to grow. While Coca-Cola, Intel, and General Electric posted brand-value changes of 2%, 4%, and -10%, respectively, Amazon's brand value grew by a scorching 23% last year.

Cost advantages
Amazon bears are quick to argue that anyone can start a website and start selling stuff from it.

My question to such skeptics: Can they be profitable?

Amazon had been around for seven years before it turned a profit in the fourth quarter of 2001. It's currently on an expensive building splurge of fulfillment centers across the country. The more strategically located centers that go up, the greater the speed and efficiency with which Amazon can get its products to customers and the greater the barrier to entrance for competitors. A competitor not confined to a small niche of retailing would have to spend billions to match Amazon's distribution scale.

If you don't believe such barriers exist, just ask yourself: When's the last time you visited (Nasdaq: OSTK  ) ?

Switching costs
A third type of advantage Amazon sports has to do with switching costs. Though you can surely pick and choose who you order products from, rare is the company that offers as good a deal as Amazon Prime. For $79 annually, Prime members get free two-day shipping on all purchases, as well as access to more than 5,000 steaming movies and TV shows -- a potentially serious threat to Netflix (Nasdaq: NFLX  ) .

Anyone who keeps track of shipping costs knows that such ancillary charges can really add up over time, and the desire to avoid these charges is strong motivation for customers to stick with Amazon.

Network effect
With every person who uses Amazon, the site becomes more valuable for other customers. Critics scoffed when Amazon CEO Jeff Bezos decided to allow negative reviews of company products to appear on its website. Years later, I think it's pretty clear that Bezos was on to something.

These days, if consumers want to know whether a product is worth their time and money, they head over to Amazon to see what others have said about it. Such an association creates a virtuous cycle: The more traffic that gets directed to Amazon, the more reviews that are read, which leads to further reviews being submitted, which leads to even more traffic. Once such a trend is started, it's hard for competitors to gain the upper hand.

What are you waiting for?
Fool co-founder David Gardner has said before that he believes Amazon will one day outgrow Wal-Mart (NYSE: WMT  ) , a company with more than twice the market cap. And it would be hard to counter the argument that e-tailing is the wave of the future. With Amazon standing out as the market leader in this category, it has a huge head start on the competition.

If you think the company might be priced to perfection already, you'll notice that I didn't use any numbers in describing Amazon's attractiveness -- no stock quotes, no P/Es, no growth estimates. Such an unconventional approach is common in The Motley Fool's flagship service, Stock Advisor. Over the past nine years, the average pick in the service has returned a whopping 110%, versus the S&P 500's measly return of just 20%.

If you're still not convinced Amazon's the right stock for you, there are plenty of other great companies out there. In fact, Stock Advisor is currently offering a special free report: "The Only Stock You Need to Profit From the NEW Technology Revolution." It's yours, absolutely free.

Though Fool contributor Brian Stoffel loves charity, he has no intentions of shelling out by selling early. He owns shares of Amazon, Netflix, and Intel. His holdings of Amazon will be at least $4,000 by Aug. 20, 2011.

The Motley Fool owns shares of Coca-Cola and Wal-Mart Stores. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Intel, Netflix, Wal-Mart Stores, and Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. Motley Fool newsletter services have recommended buying puts in Netflix. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Read/Post Comments (4) | 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 July 12, 2011, at 1:53 PM, Popnfresh100 wrote:

    "Although Amazon has a much more modest ranking at No. 36 globally, there are no e-tailers that rank above it"

    What are you smoking?

    Etailers ranked above Amazon-

    Disney - number 10

    HP- number 11

    Louis Vuitton - number 16

    Apple - number 17

    H and M - number 21

    Ikea - number 28 (Ikea doesn't count as an etailer?)

    And of course, Google is number 4- you've never heard of Google checkout? Google books?

  • Report this Comment On July 12, 2011, at 1:59 PM, Popnfresh100 wrote:

    "My question to such skeptics: Can they be profitable?"

    Do they need to be?

    Look at the list from my previous comment- how many of those companies need their .com to be independently profitable.

    The same is true for Walmart, Target, Best Buy, Barnes and Noble, etc. They make their money from brick and mortar operations- a portion of which (milk, coffee, last minute and impulse purchases) will NEVER migrate online.

    The .com is just a loss leader to build brand awareness.

    That's why an Amazon sales tax would kill the company.

    -sorry, last comment

  • Report this Comment On July 12, 2011, at 8:16 PM, TMFCheesehead wrote:


    Though all of the companies you mentioned have an internet sales presence, none of them are pure play e-tailers like Overstock or Ebay (or, of course, AMZN). I've visited Disney, been to Ikea, H&M , Apple stores, etc. All of these companies have a bricks and mortar aspect. In the commercial sense, AMZN does not.

    As for how these companies would fare with just their internet operations, that would require some more research. I will say this:

    1) Their sales would greatly be reduced

    2) I'm ok with in-store impulse buys not being a part of the AMZN experience

    Brian Stoffel

  • Report this Comment On July 14, 2011, at 12:04 AM, Popnfresh100 wrote:


    Trying not to get drawn back into this... I like how your portfolio is shaping up. I don't even mind Amazon all that much as a pick- for momentum and because it is deeply beloved on wall street.

    It's just the logic behind the pick comes across as this:

    1. Lots of people and companies sell things online. Therefore, it's difficult to sell things online for a profit.

    2. In addition, most companies sales would be greatly reduced if they were online-only.

    3. Amazon is one of the few companies to go online-only, had a hard time making a profit for many years, and even today have pretty crummy margins

    4. Yet in spite of this, they manage to do better, and have a better brand reputation than ANY other company. Unless you count all those cheaters that made the clever decision NOT to limit themselves exclusively to online shopping.

    That is not a competitive advantage- its just asking to be graded on a special curve.

    To me, Amazon is like the guy who runs a marathon by walking on his hands. It's impressive that he can do that, and I'm sure they'll show him on television. But they don't give trophies for the fastest hand-walker. If I had to bet- I'd rather go with someone who just runs.

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