The Best E-Commerce Stock for 2007: Blue Nile

The best e-commerce stock for 2007 found life because shortsighted salespeople turned up their noses at Mark Vadon when he showed up dressed in shorts and sandals while shopping for an engagement ring. What these sales folks could not have known was that Vadon, then a Stanford MBA and management consultant at Bain & Company, would use the brush-off as his catalyst to develop online diamond purveyor Blue Nile (NASDAQ:NILE), of which he's the CEO.

Truly disruptive business
Selling engagement rings online would seem a venture doomed to failure. After all, customers (OK, men) have been trained that shopping for the perfect engagement ring is a careful, drawn-out, managed process involving much comparison and consideration. Then again, from what I hear -- my wife told me soon after we met that she never wanted an engagement ring, and I, of course, snapped her up as quickly as possible -- the process is a painful and expensive one, too. What Blue Nile has done is to bring care, comparability, and education in selecting the perfect diamond to their online experience. Moreover, though it's an online venture, the company has considerable help waiting just a mouse click or phone call away. What Blue Nile has done is turn diamond buying into a truly customer-directed experience -- and with lower prices. In retrospect, how couldn't this company have thrived versus the so-called Main Street jeweler? Today, Blue Nile trails only Tiffany (NYSE:TIF) and Zale (NYSE:ZLC) as buyers of wholesale diamonds.

There's a lot to like about Blue Nile. The company is incredibly capital-light. It operates no stores. It's negotiated long-term supply relationships with its vendors such that it gets favorable pricing. It gets paid up front and then takes one to two months to pay its suppliers, so that it has a negative working-capital cycle. The asset-light, low-working-capital business model allows for aggressive diamond pricing, which can be a formidable and enduring competitive advantage. Blue Nile sells its diamonds at roughly 20% above cost; its bricks and mortar counterparts simply cannot match those margins. Low cost wins. Sorry, ladies -- this applies even to engagement rings. Think of it as getting more bang for your fellow's buck.

Dazzling the customer
Management relentlessly focuses on the customer, in seeking to create the "perfect order." That focus is creating results. Website traffic increased in the most recent reported quarter (Q3 2006), as did the conversion rate of that traffic. Total orders increased 19.4% year over year, and the average order price was $1,884, versus $1,773 last year. The online experience includes a search engine sifting through more than 50,000 stones, as well as an on-time order delivery rate of 99.96%

Last September, at the ThinkEquity Growth Conference in San Francisco, Vadon laid out the difference between the Blue Nile experience and that of the traditional diamond sellers:

I cannot help thinking that the unyielding single-mindedness on the customer experience stems from Vadon's own encounter back in 1999. I wonder whether those unthinking salespeople knew what change they were unleashing on their industry!

The Foolish bottom line
I think Blue Nile qualifies as your best e-commerce stock for 2007, but let us know what you think in CAPS, our Motley Fool community-intelligence database. Rate Blue Nile as an outperform, or, if you disagree, rate it as an underperform. Make your voice heard. Based on your responses, we'll declare 2007's best e-commerce stock next week.

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Fool contributor Jim Gillies owns no shares of any company mentioned. The Fool has a disclosure policy.