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My Money Is On This Hot Internet Company

By Brian Stoffel - Updated Apr 6, 2017 at 7:40PM

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Amazon will be the retailer of the future.

Today I'm going to tell you about an Internet superpower that, within the next two months, I'll be buying into with $4,000 of my own money. I'm so confident that my pick will outperform the market that if I sell any shares within the next three years, I'll donate $100 to charity.

This is the sixth article in a series that I'm writing about my retirement portfolio, which I'm dubbing "The Cheesehead Portfolio" in honor of my home state of Wisconsin. If you wish to see my first five selections for the portfolio, check them out:

Three years from now, I fully expect today's pick, Amazon (Nasdaq: AMZN), to handily trounce the market because of its growing list of competitive advantages.

The key to greatness: enduring competitive advantages
When it comes to the investment world, we should always be looking for companies that have enduring competitive advantages. Such advantages can keep competitors at bay for decades while returning superior returns for investors. Amazon has four competitive advantages that will give it the upper hand for years to come.

According to Interbrand's 2010 report, the companies with the greatest brands out there include Coca-Cola (NYSE: KO), Intel (Nasdaq: INTC), and General Electric (NYSE: GE). Although Amazon has a much more modest ranking at No. 36 globally, there are no e-tailers that rank above it.

That means when it comes to online shopping, Amazon is positioned in our brains to be the option of choice. Best of all, thanks to consumer-focused products such as the Kindle, its brand value continues to grow. While Coca-Cola, Intel, and General Electric posted brand-value changes of 2%, 4%, and -10%, respectively, Amazon's brand value grew by a scorching 23% last year.

Cost advantages
Amazon bears are quick to argue that anyone can start a website and start selling stuff from it.

My question to such skeptics: Can they be profitable?

Amazon had been around for seven years before it turned a profit in the fourth quarter of 2001. It's currently on an expensive building splurge of fulfillment centers across the country. The more strategically located centers that go up, the greater the speed and efficiency with which Amazon can get its products to customers and the greater the barrier to entrance for competitors. A competitor not confined to a small niche of retailing would have to spend billions to match Amazon's distribution scale.

If you don't believe such barriers exist, just ask yourself: When's the last time you visited (Nasdaq: OSTK)?

Switching costs
A third type of advantage Amazon sports has to do with switching costs. Though you can surely pick and choose who you order products from, rare is the company that offers as good a deal as Amazon Prime. For $79 annually, Prime members get free two-day shipping on all purchases, as well as access to more than 5,000 steaming movies and TV shows -- a potentially serious threat to Netflix (Nasdaq: NFLX) .

Anyone who keeps track of shipping costs knows that such ancillary charges can really add up over time, and the desire to avoid these charges is strong motivation for customers to stick with Amazon.

Network effect
With every person who uses Amazon, the site becomes more valuable for other customers. Critics scoffed when Amazon CEO Jeff Bezos decided to allow negative reviews of company products to appear on its website. Years later, I think it's pretty clear that Bezos was on to something.

These days, if consumers want to know whether a product is worth their time and money, they head over to Amazon to see what others have said about it. Such an association creates a virtuous cycle: The more traffic that gets directed to Amazon, the more reviews that are read, which leads to further reviews being submitted, which leads to even more traffic. Once such a trend is started, it's hard for competitors to gain the upper hand.

What are you waiting for?
Fool co-founder David Gardner has said before that he believes Amazon will one day outgrow Wal-Mart (NYSE: WMT), a company with more than twice the market cap. And it would be hard to counter the argument that e-tailing is the wave of the future. With Amazon standing out as the market leader in this category, it has a huge head start on the competition.

If you think the company might be priced to perfection already, you'll notice that I didn't use any numbers in describing Amazon's attractiveness -- no stock quotes, no P/Es, no growth estimates. Such an unconventional approach is common in The Motley Fool's flagship service, Stock Advisor. Over the past nine years, the average pick in the service has returned a whopping 110%, versus the S&P 500's measly return of just 20%.

If you're still not convinced Amazon's the right stock for you, there are plenty of other great companies out there. In fact, Stock Advisor is currently offering a special free report: "The Only Stock You Need to Profit From the NEW Technology Revolution." It's yours, absolutely free.

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Stocks Mentioned, Inc. Stock Quote, Inc.
$116.46 (3.58%) $4.02
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$123.72 (0.08%) $0.10
Netflix, Inc. Stock Quote
Netflix, Inc.
$190.85 (5.03%) $9.14
The Coca-Cola Company Stock Quote
The Coca-Cola Company
$63.04 (1.88%) $1.16
Intel Corporation Stock Quote
Intel Corporation
$38.61 (3.21%) $1.20
General Electric Company Stock Quote
General Electric Company
$67.08 (4.70%) $3.01, Inc. Stock Quote, Inc.
$33.46 (5.85%) $1.85

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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