There are two likely sides to this Amazon.com (NASDAQ:AMZN) bout; the model and the valuation. I'm guessing that Rich will be coming in heavy on the valuation. I can't say that I'd blame him because the Amazon model is pretty much ironclad.
Why? Well, let's just say that some of the bigger e-tailing myths have been busted by Amazon over the years.
- Margins will always be cutthroat because the competition is just one click away. Tell that to Buy.com, the company that has been trying to make a name for itself by slashing its prices to 10% off Amazon's going rates. That has worked out so horribly that Buy.com had to pull its IPO last month.
- You can't turn a profit by offering free or subsidized shipping. Amazon has been consistently profitable since introducing its free Super Saver Shipping option on media orders of $25 or more.
- Pure online retailers will be supplanted by their bricks-and-mortar rivals as they migrate online. Time has only made Amazon more powerful. It's still the most popular online retailer, and companies like Toys "R" Us, Target (NYSE:TGT) and Office Depot (NYSE:ODP) are featured partners of Amazon that have turned to the online giant to assist them in making it happen online.
- Online companies are greedy and irresponsible with their shareholders, spewing forth stock options as if they were carrot candy. Over the past year, Amazon's count of fully diluted shares outstanding has risen by less than 1%.
- There are no technological advantages between virtual checkout carts. Amazon was a pioneer, and many of the conveniences -- like one-click ordering -- experienced by its patrons are patented. Beyond that, shoppers trust Amazon and that's huge in the uncertain "click and buy" world.
The recipients behind most of the more than $8 billion in sales that Amazon rang up in 2005 know that Amazon delivers. Investors do, too. Backing out a one-time legal item, free cash flow has soared by 22% to $515 million over the past year.
With an improving balance sheet and fundamentals shining brightly, one can pick on Amazon's valuation. A retailer at 2.2 times sales? A retailer at 37 times trailing earnings and free cash flow? However, it's not as simple as that. While you will find traditional retailers like Tiffany's (NYSE:TIF) that fetch similar top-line multiples despite not growing as fast as Amazon, there is more to gauging Amazon's value than stacking it against your garden variety shopsmith. Amazon's A9.com is a fast-growing search engine. Its IMDB.com is the site where movie buffs go online when they need to settle a score. Alexa.com is an active gauge of website popularity. Amazon is also a player in everything from Internet auctions to virtual mall landlords. The valuations for its peers in all of these niche areas average far greater than what Amazon is presently fetching.
However, even Amazon's conventional retailing business is anything but conventional. From the company's announcement two months ago that it would begin selling digital versions of books, chapters, or even individual pages to its acquisition of on-demand publisher BookSurge, Amazon may no longer be a good fit in the stodgy class of thin-margin inventory-based retailing.
Some retailers stumble in overseas expansion, but not Amazon. International sales now account for 45% of the company's total sales since it has negotiated the cultural difference with aplomb. In China it owns Joyo.com, the populous nation's largest online bookstore. In the United Kingdom it launched a DVD-rental service that has led many to wonder if it will take on Netflix (NASDAQ:NFLX) stateside. Whip out the Risk playing board and you'll see CEO Jeff Bezos' fingerprints all over the place. Just about everywhere you turn, Amazon matters.
Amazon isn't just a retailer. It's an opportunist. How else can one explain the way Amazon will sell you something new and then offer you a chance to sell it back to a more frugal-minded shopper through the same storefront. When you can regurgitate a purchase over and over again -- profiting from every transaction -- how can one dismiss Amazon as a run-of-the-mill retailer when it is both the merchant and the consignment shop all rolled into one?
The company's head start has also come in handy in terms of collecting information. You won't find another retailer with the depth of product reviews available as well as the inherent know-how of serving up the appropriate impulse items based on where you've been, what you're buying, what you're browsing, and even where you're from. This seasoned state of savvy doesn't materialize overnight, you know.
Amazon is huge. It will likely top $10 billion in sales this year. If you're not won over by the stock's current valuation, just wait around until many of its margin-pumping initiatives gain traction. It was in the fall of 2002 that David Gardner recommended the stock to Motley Fool Stock Advisor subscribers. Those who bought in were treated to an investment that has appreciated more than four times greater than the S&P 500. The future only gets brighter. Yes, there are two sides to this Amazon story, and both of them look pretty darn good.
Wait! You're not done. This is just a quarter of the Duel! Don't miss the Bear opening argument and the Bull and Bear rebuttals. Even when you're done, you're still not done. You can vote and let us know who you think won this Duel.
Fool contributor Rick Munarriz relishes being the understudy for Mr. Brightside. He does own shares in Netflix. He is also part of the Motley Fool Rule Breakers analytical team, scouring sectors to find the next ultimate growth stock. You can find out more with arisk-free trial subscription. The Fool has a disclosure policy.
