3 Reasons Not to Sell Amazon Despite Its Latest Run

Back in May of last year, I called Amazon (NASDAQ: AMZN  ) my highest conviction stock pick in the market. Since then, the stock has risen about 30% -- far outpacing the broader market, and making me look like a pretty good investor -- even though eight months is hardly long enough to claim it was a good call.

Since then, some -- including our top technology analyst Eric Bleeker -- have been offering up reasons to sell Amazon. But I'm here to show you why I don't intend to sell my shares, even though they make up roughly 12% of my real-life holdings.

Read all the way to the end and I'll offer access to a special premium report on Amazon that digs into greater detail on the company. You'll also be given real-time updates throughout the year as big news arises.

Sure, it's expensive
I won't beat around the bush here. By most traditional metrics, Amazon is an expensive company. Just take a look at how it compares to Apple (NASDAQ: AAPL  ) and Google (NASDAQ: GOOGL  ) -- two other companies that -- like Amazon -- have so many different irons in the fire that it's difficult to discern exactly what their singular specialty is.

Company

Price/Earnings 

Price/Free
Cash Flow

Price/Sales

Amazon

3,260

118 

2.1

Apple

11

11 

3.1

Google

23

19 

5.1

Source: Yahoo! Finance.

As you can see, when it comes to earnings and free cash flow, Amazon simply looks ridiculously expensive compared to these peers. But when one looks at sales, the picture is a bit different, with Amazon actually looking like the cheapest of the three.

How could this be? Well, if there's one big reasons, it's this: Amazon is spending money hand over fist right now to invest in the future and offer its products for bargain-basement prices. That simply isn't the case with Apple or Google, which sport profit margins of 27%  and 22%,  respectively. Amazon's profit margin, on the other hand, comes in at a much lower 0.07%.

But margins won't always be this way, and one of our top value investors agrees with me. Sure, Amazon may appear expensive, but over the next five years, today's price tag may seem more than fair. CEO and Founder Jeff Bezos knows what he's doing: sowing the seeds for long-term success.

A sustainable competitive advantage
Amazon has made its name by becoming the leader in customer service, especially in timely delivery of packages. The key to success in this arena has been the build-out of enormous, extremely expensive fulfillment centers throughout the U.S.

The company has spent billions over the past two years in building out these centers. Along with investments in technology -- like the development of next-generation tablets and e-readers -- the costs of these fulfillment centers have eaten up the lion's share of Amazon's cash flow. Eventually, the company will be spending less in this arena, as Amazon doesn't need an unlimited number of these centers to deliver its products.

When this moment arrives, it will be able to produce copious amounts of free cash flow. Joe Magyer, the lead advisor of our Inside Value service, tends to look only at unloved and dirt-cheap stocks for his subscribers. And yet, even he can't resist Amazon. It is currently a Core  stock for his members; as he recently stated: "Where Mr. Market sees Amazon throwing good money after bad, I see an economic powerhouse forgoing mediocre profits today for massive ones tomorrow ."

And the best part about this spending spree is that it puts ever more distance between Amazon and potential competition such as Wal-Mart (NYSE: WMT  ) or Target (NYSE: TGT  ) . Any company trying to match the scope of Amazon's fulfillment centers would have to invest hundreds of billions before being able to offer the same type of service.

International concerns? Don't get ahead of yourself!
The final reason some Amazon bears say now is the time to sell is because of the difficulty of international expansion. As the Fool's senior tech analyst, Eric Bleeker, pointed  out, Amazon is only in seven different countries, and expansion in such areas as India and China will be very difficult given the lack of infrastructure comparable to what we have in the U.S.

But we're getting ahead of ourselves. Sure, expansion abroad may be tough, but with only 4.9%  of all retail sales taking place online in America, I think there's still tons of room for growth domestically.

So there you have it. Although it's priced high, today's price could be a deal five years from now. The company has a distinct competitive advantage that offers protection for investors, and there's still tons of room for growth domestically.

If you'd like a second opinion, I suggest you check out our latest premium report on the company, prepared by Joe Magyer.  

He'll tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon in our new premium report. Our report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.


Read/Post Comments (4) | Recommend This Article (3)

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 January 14, 2013, at 10:27 PM, dave2004 wrote:

    the main reason why amazon have expand so rapidely is that they didn't have to collect sales taxes. And you seem to forget that they don't pass in expense right away the built of their warehouses, they capitalize the cost.

  • Report this Comment On January 14, 2013, at 10:40 PM, H3D wrote:

    "3 Reasons Not to Sell Amazon Despite Its Latest Run"

    Lets see

    1) It's a Bubble

    2) IT'S A BUBBLE

    3) When it P/E drops to 20, you say goodbye to 99.3% of your investment.

    This is a game of musical chairs. Are you the mark?

  • Report this Comment On January 14, 2013, at 11:25 PM, OptionsLOL wrote:

    Are you serious or joking with the claim below?

    "And the best part about this spending spree is that it puts ever more distance between Amazon and potential competition such as Wal-Mart (NYSE: WMT ) or Target (NYSE: TGT ) . Any company trying to match the scope of Amazon's fulfillment centers would have to invest hundreds of billions before being able to offer the same type of service"

    How do you think TGT and WMT support 71.86B and 464.41B in revenue?

    I have this feeling they have already in place what AMZN is still trying to build...don't you think?

  • Report this Comment On January 15, 2013, at 4:00 AM, VN36626 wrote:

    you did not learn nothing

    AMZN price is assuming that AMZN is the only online company on all world....

    now I will give many reasons why to read off of this bubble

    1- AMZN is not doing money

    2- AMZN spending money to increase revenue

    3- WMT,BBY,Target have much more cash (each one) then AMZN some of them selling at better price then AMZN

    4- tax collection started in California (20% of AMZN sell)

    5- on the states that TAX collection started BBY confirm up on revenue....

    6- AMZN is selling dreams more then 15 years

    7- AMZN never ever pay dividend

    8- world is going to resection

    9 - AMZN OPEX is going up and up

    in my opinion if economy will slow like I think we will see this stock at 2 digits price very soon

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