This article is part of our Rising Star Portfolio series.
My latest Rising Star portfolio purchase may turn out to be a controversial one, but there's no doubt in my mind that I'm buying into a truly great company. I've decided to take a stake in Amazon.com (Nasdaq: AMZN).
The business
Web giant Amazon.com is headquartered in Seattle, but it's utterly transcended geographical limits; it's everywhere. The e-commerce company has come a long, long way from its "humble" yet utterly disruptive beginnings as an "online bookseller" or even a megaretailer that sells everything from music to lawnmowers to beauty supplies to bulk cereal to large-screen TVs.
Amazon Prime subscribers pay $79 per year not only for free and cut-rate shipping, but also for streaming video content that's a direct competitive shot at Netflix (Nasdaq: NFLX). Prime also encourages loyalists to buy more stuff through Amazon; Fast Company recently contended that Prime creates Amazon "addicts," causing a typical Prime customer to double the money spent at Amazon.
Apple's (Nasdaq: AAPL) iTunes put legal music downloads on the map, but Amazon also sells MP3s and provides a digital cloud player. Speaking of cloud services, allowing customers to store digital information somewhere other than their own hard drives, Amazon was among the first to market. Even Apple and Netflix rely on Amazon's Web services for some of their business.
Amazon's revolutionary Kindle legitimized e-readers and e-books when many doubted that consumers even wanted the long-form written word delivered electronically; the Kindle also proved that Americans enjoy reading more than anybody thought. Meanwhile, the Kindle Fire certainly could give Apple's iPad tablet a run for the money.
This is a truly great company with a place in the history books. Founder Jeff Bezos is one of the most visionary chief executives I can think of, with a track record of foreseeing where business is going.
Amazon's likeable, too. In 2011, Amazon.com ranked No. 7 on Fortune magazine's list of The World's Most Admired Companies, and Foresee, an organization that tracks customer experience and satisfaction online, recently described Amazon as setting the bar very high when it comes to excellence in e-commerce.
Why I'm buying
In November, I cautioned investors not to buy Amazon.com shares, but to actually fear the company (for the sake of other retail and tech stocks residing in their portfolios). The factor that's changed since then is price. I had concluded my warning with a reminder to watch for share-price weakness to buy in, so here we are.
Even though Amazon's multiples are still high, the stock price has significantly receded since the fall. Remember when Amazon shares nearly hit $250 per share? A recent bearish prognostication from a Goldman Sachs analyst on Amazon's fourth-quarter sales hammered it a bit more.
In addition, Amazon boasts another attribute I love in a company: a war chest of cash. It has $6.33 billion, or nearly $14 per share, in cash, and no debt. That's the kind of company that can survive difficult times and heavily invest in the future.
Amazon may even be good for the planet, helping it fit into this Rising Star portfolio. Studies show that online shopping is greener than the old-fashioned way. (There's probably something to be said for reducing the number of individual Americans driving all over creation to find what they want.) Most of Amazon's boxes are made of 43% recovered fiber content, and they're 100% recyclable. Those air-filled "pillows" that protect your Amazon purchases are 100% recyclable and non-toxic.
The company has also implemented what it calls the Kaizen program, which means "change for the better." Through the program, Amazon employees collaborate to figure out ways to reduce waste and dream up more energy-efficient methods.
And now, the risks
Granted, even though the price has receded, Amazon still doesn't look like a screaming bargain. The shares trade at 89 times forward earnings, far higher than Apple, which trades at 11 times forward earnings, and another disruptive Internet giant, Google (Nasdaq: GOOG), which currently trades at 15 times forward earnings.
Still, looks can be deceiving, and given Jeff Bezos' visionary foresight, Amazon.com's future growth could end up astounding everyone. However, high-multiple stocks are always risky, and if some temporary bearishness nails Amazon's price, I'd love to add to my position more aggressively.
Another risk is Amazon's habit of putting other companies out of business. Although it hasn't been vilified like Wal-Mart, there are certainly rumblings about Amazon's ramifications on some folks' economic well-being. Fool contributor Jeremy Bowman recently tackled some tactics that could be dubbed questionable.
The publishing industry often comes to mind when one's tempted to look askance at Amazon. Amazon's long-tail effect has always been negative for the traditional "blockbuster" publishing model.
Still, Amazon may be more of a boon than a bummer, since it gets products in front of a ton of willing customers regardless of geography. It also works to support the writing community by offering grants to nonprofit author and publishing groups, and it has a self-publishing unit called CreateSpace. Its forays into publishing seem like a no-brainer, really.
Last but not least, Amazon is in a huge battle with the aforementioned Apple, Google, and Netflix. They all want to be your best friend for all your content needs; they also all want to get into your head. The fact that they all seek an extremely close relationship with you (and your likes, dislikes, and buying habits) is a risk in itself.
Foolish bottom line
On the whole, I believe Amazon.com is a truly remarkable company, which helps me focus less on the stock price and think very long term. Remember when people thought Amazon was overvalued because it was supposedly "just a retailer"? Obviously, that was majorly mistaken thinking. Given Amazon's continued evolution into The Great Disruptor, we may all be shocked by Amazon's next 10 years of growth.
