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It's about long-term prospects
Amazon has created a cloud server farm, established its Kindle, and entered into the grocery business. Although Amazon may be an e-commerce veteran, it is a start-up in the cloud server business, grocery market, and online streaming segments. Amazon is investing in new markets that show growth potential. As Amazon consolidates its position in new businesses, profitability will improve. Even when Amazon hits $400, the valuation suggests further upside is ahead.
The retail angle
Amazon is not just the largest e-commerce company in the U.S., it is also one of the most solid. Amazon saw same-stores sales rise 48.5%, outpacing the overall industry. Additionally, Amazon is investing in expanding its infrastructure and creating new segments. Jefferies Equity Research said Amazon grew roughly two times faster than overall e-commerce and seven times faster than overall retail. In other words, Amazon is growing many times faster than companies such as Wal-Mart.
Amazon's Web Services
Amazon operates a segment called Amazon Web Services, or AWS, which is the company's cloud infrastructure and cloud app platform business. Evercore predicts AWS's annual sales in 2013 will be $3.5 billion and account for 13% of Amazon's business in the next two years. Bernstein Research recently issued a report predicting AWS will have an estimated $20 billion in revenue by 2020.
The bottom line is that Amazon is innovative, and competing companies could lose market share. Salesforce.com (NYSE: CRM ) is a significant player in the cloud app platform business. Its Heroku program has the market-best 18% share of the cloud app space. Amazon has a 17% share and is expanding at a faster rate. While cloud app development is a small part of Amazon, Heroku is a significant piece of Salesforce.com. Amazon's pricing strategy might see it stealing additional market share in the app space.
IBM (NYSE: IBM ) acquired SoftLayer to knock Amazon off its lofty perch. IBM hoped SoftLayer would be the centerpiece of a new print, online, and outdoor advertising campaign to change the perception that AWS is the cloud sector's most important player. Synergy Research Group said Amazon accounts for more than $700 million of Platform and Infrastructure-as-a-Service revenue, which is nearly $100 million more than Salesforce.com, Microsoft, IBM, and Google combined. This suggests that the IBM acquisition did not slow down Amazon's disruptive growth.
While it's been argued that Amazon provides a good shorting opportunity, the simple fact is Amazon is investing for the future. Additionally, it just might be one of the most disruptive companies in history because it has a strategy of selling goods at breakeven prices. Amazon might hit $400, but the valuation still suggests further upside.
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