Why Amazon Could Head Even Higher

Shares of Amazon.com (Nasdaq: AMZN  ) hit a 52-week high today. Let's take a look at how it got there and see whether clear skies are still in the forecast.

How it got here
Amazon.com definitely isn't the cheapest apple of the bunch, but a three-pronged approach has given the company a clear advantage over its peers and allowed sales growth to expand 29% in its most recent quarter.

First, Amazon's core retail business is utilizing simplicity to keep customer convenience at the forefront. With Amazon's Kindle and Kindle Fire able to download books digitally, Amazon has essentially saved consumers the hassle of having to go to the bookstore. That's one of the many reasons Barnes & Noble (NYSE: BKS  ) has seen its hardback book business slowly die and why it too has turned to its e-reader, the Nook, as its only saving grace. Amazon Prime, which offers free two-day shipping on numerous items and costs just as much today as it did seven years ago, is another key factor in its success.

Secondly, Amazon has become a digital streaming nightmare for both Netflix (Nasdaq: NFLX  ) and Apple (Nasdaq: AAPL  ) . With a superior cash position to Netflix, Amazon has garnered a video library complete with 18,000 streamable movies and TV episodes and could stand to negotiate favorable content contracts in the near future. It's also made strides to expand into the U.K. Netflix is also making an aggressive international push, but is still suffering from the consumer pushback from its price increase debacle last year. Apple is hardly struggling, but faces some of its most notable iPad competition from Amazon's Kindle Fire.

Finally, Amazon is the premier cloud operating play with its EC2 pay-as-you-go platform and S3 storage infrastructure set up to allow its cloud clients to transfer data at will while only paying for what they need. Intel (Nasdaq: INTC  ) and many others tried utilizing cloud deals via contract but often failed to make this design work for them; Amazon's EC2 pay-as-you-go platform has been by far the most successful.

How it stacks up
Let's see how Amazon stacks up next to its peers.

AMZN Chart

AMZN data by YCharts

It's really been a great couple of years for everyone except for Barnes & Noble, which is struggling to reinvent itself. Even Netflix, which has corrected in a big way from its all-time high, is still up more than 250% over the past five years.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Projected Earnings Growth Rate*

Amazon.com 15.1 35.7 71.2 33.6%
Barnes & Noble 0.9 NM 45.2 (167.1%)
Netflix 5 23 31.8 15.6%
Apple 5.6 12 12.4 22.3%

Source: Morningstar. NM = not meaningful. *Figures from Yahoo! Finance.

This is definitely a tale of four companies on four different paths.

Based on the metrics above, Barnes & Noble is merely struggling for its survival. On the opposite end of the spectrum, the largest company in the world, Apple, is looking incredibly cheap at just 12 times forward earnings and a projected five-year growth rate of 22%. Netflix is struggling to find new avenues of growth after streaming and DVD competition, as well as management miscues, ate into its subscriber base. Finally, Amazon has chosen to reinvest nearly all of its cash flow into building out its three separate operations. It'll give up profitability now in exchange for greater market share gains.

What's next
Now for the $64,000 question: What's next for Amazon.com? That depends on whether Amazon continues to focus on the user experience, can successfully negotiate further content contracts for its streaming library, and can maintain its cloud dominance.

Our very own CAPS community gives the company a three-star rating (out of five), with 80.3% of members expecting it to outperform. You can count me among the 5,200-plus members that have bestowed a CAPScall of outperform on Amazon, with my call currently unchanged at the moment.

Normally, I don't chase companies that don't put profits first, but Amazon.com is one of the rare exceptions. Since I profiled Amazon as one of my 10 large caps to rule them all, it's only expanded its reach in streaming media and in the cloud. Little by little, Amazon has pushed traditional retailers into the corner while forcing even those companies that thrive off Internet-based services to adapt. Amazon's profits might seem anemic now, but it's not a company I'd dare stand in the way of given its cash flow capabilities.

Without question, Amazon is at the forefront of the streaming and cloud revolution. Realizing this, our analysts have just released a premium research report on the company highlighting the opportunities and pitfalls confronting the e-tailer. In addition, the report comes with a year of regular updates and costs less than a week's worth of coffee. Make sure you get your investing edge now by clicking here.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Amazon.com, Netflix, and Apple. Motley Fool newsletter services have recommended buying shares of Amazon.com, Netflix, Apple, and Intel, as well as buying puts in Barnes & Noble. 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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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 August 27, 2012, at 12:43 PM, pondee619 wrote:

    From AMZN's CAPS pages we get:

    PE TTM 303

    PE current 299

    SALES growth 5 year 31

    EPS past year NEGATIVE

    Your projected earning growth rate= 33

    Current PEG 299/33=9

    TTM PEG 303/33=9.18

    5 year PEG 71/33=2.15

    A little math

    From TD Ameritrade research AMZN current earnings .82. Increase that 33% each year for the next five years and you get $3.04. Current price of 244 divided by 3.04 = 80. A five year anticipated PE of 80! (Close enough to 71 for government work?)

    My question:

    A what point, in your mind, does a stock become too expensive to buy?

  • Report this Comment On August 29, 2012, at 3:03 PM, pondee619 wrote:

    Sean:

    I would like an answer to my question. If Amazon is not too expensive to buy now , at what level, do you believe, does a stock become too expensive? You still there, Sean?

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