True blue chip stocks are more than just a quick trade. To earn this title, the stock needs to have a rock-solid business model and a long history of proven staying power. These are the stocks you can buy and forget for decades, never losing sleep over their long-term value.
Which of course begs the question: does online retailer Amazon.com (AMZN -1.14%) have what it takes to be called a blue chip stock? Let's take a look.
Checking off the boxes
A traditional blue chip stock would meet most or all of these criteria:
- A leading position in its industry.
- A rock-solid balance sheet.
- A long history of steady revenue growth.
- Predictable profits, both in free cash flows and after-tax earnings.
- A household brand name, familiar to anyone in the company's target markets.
- A generous dividend history.
Wal-Mart Stores (WMT -0.65%) and Costco Wholesale (COST -0.55%) would be good examples of retailer stocks hitting all of these points. Both retail giants check off almost every box with ease, adding just a couple of asterisks for further research.
How does Amazon measure up to these daunting yardsticks? It's a mixed bag.
First, Amazon is not shy about focusing on revenue growth above everything else. Amazon's sales aren't just increasing -- they're racing higher:
AMZN Revenue (TTM) data by YCharts
Amazon's trailing-12-month sales have nearly quadrupled over the past five years, while Costco's trailing revenues only grew 48% larger and Wal-Mart settled for 18% growth.
CEO Jeff Bezos is growing his business as quickly as possible, at paper-thin profit margins. It's all about creating economies of scale, network effects, and brand-building. Wider margins and large profits will have to wait until later -- or perhaps never. And this single-minded strategy pays off in the form of rampant revenue growth.
The company's profits are indeed predictable, just not very large.
Retailers never ruled the business world in terms of juicy profit margins anyway, but Amazon's margins are a different breed of "thin." Here's how Amazon's profit margins have compared with Costco and Wal-Mart over the past decade:
AMZN Profit Margin (TTM) data by YCharts
This is a strike against Amazon's blue chip status, of course. Investors like to see lots of profits, and getting them today is better than tomorrow. Instead, Amazon stubbornly sticks to its maximal revenue growth strategy, where low prices serve to pull in new customers.
Another niggling point against Amazon's blue-chip chances comes from the lack of a dividend. Again, the company would rather reinvest the money others might earmark for dividends into another growth project, or eliminate the extra cash altogether with another price drop. This is not a stock for income investors.
Amazon CEO Jeff Bezos. Source: Amazon.
Amazon hits home in all the remaining check boxes. Brand name? Yep. Leading market position? You bet. Solid balance sheet? In some ways, I'd take Amazon's assets and liabilities over Wal-Mart's.
The final verdict
And many investors shy away from Amazon's intense revenue-growth focus. If you're looking for strong dividends or torrential profits, Amazon isn't for you.
In my eyes, there's plenty to love here. I have indeed started a modest position of my own, which I expect to keep around for the long haul.
When Bezos decides that he's had enough of this low-margin sales growth, and that online retail has captured a large enough portion of the global retailing market, the profits will come. And it might be many years from now, which is why I'm delighted to see the company in such strong fundamental shape. I'll be there.
So I would say yes -- Amazon.com is indeed a blue chip stock on par with industry legends like Costco and Wal-Mart. The honor comes with the caveats listed here, but nobody's perfect.
