3 Reasons Why I'm Considering Amazon for My Portfolio

Last week, I wrote about five stocks which I feel have plenty of room to grow in the near future. One of these five companies will be added to my portfolio at the end of the month. With that in mind, I have decided to take a deeper look at each of the companies, and identify three things about each one that I think make them worthy additions to my portfolio. I now turn my attention to Amazon.com (Nasdaq: AMZN  ) , one of the best retailers in the world.

It's more than just retail
The rise of Amazon has led to the downfall of many traditional retailers, a trend that won't be ending anytime soon. The online retailer is often cited as the main cause of the downfall of former "big box" leader Best Buy (NYSE: BBY  ) , culminating in the public offer by Best Buy founder Richard Schulze to take his former company private.

However, one advantage that Amazon has over traditional brick and mortar retail -- legal avoidance of sales tax -- may soon be coming to an end, further reducing its already slim margins. After long opposing paying sales taxes, CEO Jeff Bezos now supports an equal sales tax on all Internet purchases. The impact from potential taxes won't be felt for a while, but any further shrinking of its already slim margins bears watching.

Luckily, it's not the retail business that has me convinced that Amazon will come down from its lofty P/E heights. While the retail business will continue to add to the top line, Amazon's future may be in the cloud. Its Elastic Compute Cloud, or EC2, is widely recognized as one of the best supercomputers in the world, and helps place Amazon among the elites in cloud computing. The speed of EC2 allows it to offer its service more like a utility, while cloud provider Rackspace Hosting (NYSE: RAX  ) is constrained by its limited hosting options.

Prime continues to extend its reach
Amazon Prime is worthwhile for any person who  makes as few as 16 purchases a year on Amazon, due to the free expedited shipping that members receive. That said, Amazon is not alone in speedy delivery of goods. The Wall Street Journal reported back in December that search heavyweight Google (Nasdaq: GOOG  ) was planning on partnering with multiple retailers --  Macy's, The Gap, and Office Max were reportedly on board -- to offer one-day shipping, but nothing official has been mentioned since the initial reports. If Google manages to get something like this off the ground, Amazon could lose some ground as the quick-shipping destination of choice.

In my opinion, the true benefit of a Prime membership is the video service. Video-streaming leader Netflix (Nasdaq: NFLX  ) may have more content, including the addition of new Arrested Development next year, but Amazon truly has Netflix beat on price. The cheapest plan Netflix offers checks in at $7.99 per month, or approximately $96 per year. Plus, with Amazon you get the staid leadership of Bezos, as opposed to the sometimes strange e-mailing leadership of Netflix CEO Reed Hastings.

A vision for the future
If you take a look at the past year for Amazon, earnings look pretty terrible when compared with revenues. While revenue and sales continue to grow, faster growth of expenses has hampered the performance of earnings. For example, its most recent quarter saw only $7 million of net income on over $12.8 billion in revenue. A good portion of these expenses are tied up in spending on distribution, with the company planning on opening a total of 18 fulfillment centers this year. While not cheap, this expansion will allow for even quicker delivery of most physical items, ensuring customer satisfaction in the years to come.

The expansion of its warehouse footprint means that the company needs to find a way to retain employees. A recently-launched incentive allows certain warehouse employees to receive up to $2,000 a year for four years in pursuit of vocational training, even if the resulting training leads to the employee leaving the company. The care shown for employees, especially in light of complaints last year about conditions in a Pennsylvania warehouse, shows that the company is fully committed to its workers.

Is it good enough?
Are these three reasons enough to warrant the addition of Amazon to my portfolio? I have been keeping a close eye on the company since earlier this year, and they haven't done anything to change my opinion. As I dig further into the other four companies on my list, time will tell if it comes out ahead of all the rest. To keep an eye on Amazon to see if it wins this portfolio battle, click here to add it to My Watchlist.

Also, be sure to check out our latest premium research report on Netflix, created by The Motley Fool’s in-house expert on the streaming content provider. Competition in the space is heating up, but can Netflix leverage its first mover status in international markets for long term riches? Find out the answer to this question, as well as an overview of all the "must know" issues for Netflix investors by clicking here now.

Fool contributor Robert Eberhard holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Netflix, Amazon.com, Best Buy, and Google. Motley Fool newsletter services have recommended buying shares of Google, Netflix, Rackspace Hosting, and Amazon.com. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 08, 2012, at 8:52 AM, Secs27 wrote:

    Amazon is a dangerous momentum stock. It is predominantly owned by several hedge funds that buy it in collusion and engage in circular trading. They are Bezos' Princeton alumni.

    That said, the company operates on profit margins equal to a sipuoermarket. Last quarter their sales revenue did not even meet drastically lowered projections. Every business they are in is a low margin one with no pricing power and tons of competition. The continue to offer a low end experience. With resect to the cloud, they keep lowering the cost which shows demand is waning. Microsoft and IBM offer far superior cloud systems.

    Did you know that Amazon lists their cost of sales off balance sheet dramatically skewing their gross profit margin. Additionally, their retail business does not offer the best pricing. Yesterday I purchased a tv. Amazon had it listed for $1497 free shipping. Target and Walmart had it for $1399 free shipping. I found it on "thefind.com" for $1298 with fee shipping. Far better deals can be found elsewhere and when shoppers become more savvy, they will migrate towards better deals. I believe that Amazon will trade more in line with its growth rate when hedge fund lose patience with Bezos and Amazon. When this comes to fruition, Amazon has at least 180 points to the downside. I would certainly add it to your portfolio, but on the short side.

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