Amazin’ Amazon (AMZN)
With the market in the crapper and volatility a constant factor, stock trading is most certainly a risky venture these days. For these reasons, I do not recommend to anyone I know heavily investing in stocks. However, many people still would like to dip their toes in and there is a chance that if the market recovers, large returns will be had from equities. With that in mind, I would like to dissect one stock that has the fundamental traits of surviving economic turmoil.
Amazon.com (NASDAQ: AMZN), the world’s largest online retailer by a wide margin, is one of the few stocks in the S&P 100 to actually be up this year. In fact, Amazon is one of the few stocks in the index to actually be up or even over the last 12 months. Wal-Mart (NYSE: WMT) and McDonalds (NYSE: MCD) are the only stocks in the DOW Jones index not down in that period and are both relatively flat like Amazon. Being flat after the market already crashed over 50% is a very strong sign for a retailer.
But, current trends are not necessarily indicative of future trends so without further ado, here is a simple breakdown of why Amazon has a bright looking future in an otherwise gloomy marketplace:
- Diversified – With international sites around the world - Canada, United Kingdom, Germany, Japan, France and China – Amazon certainly has a significant worldwide presence. This is especially beneficial now because different foreign markets will recover at different paces from this economic crisis. If people, such as Jim Rogers, end up being correct and China takes off like a rocket while the US still languishes, Amazon will not be overly damaged. It could even grow!
- Market position – Amazon is the Wal-Mart of the online world. When people talk about online shopping, Amazon is almost certainly in that conversation. Having heavy name recognition and being known for reliability is most important for online retailers as some shoppers are still skittish about buying from a website.
- Competitive Advantages – Free Shipping! What was once seen as a crazy gamble by many has turned it into one of the killer edges that Amazon has over the competition. While many other retailers do offer free shipping, it can be inconsistent and often requires large dollar amounts to qualify. After $25, most items on Amazon can be shipped completely free and let’s face it, most people are not buying a pack of gum online so most orders should meet the minimum.
- Essential Products – In a recession (or depression) the saying goes that “if you can eat it, smoke it or drink it” then it will sell. It is quite apparent even today that the high-end retailers are suffering from decreased business, while Wal-Mart continues to surpass expectations for earnings. Amazon, although not heavily in the food market, carries many essential everyday items that people need. They carry large selections of clothing, home and even automobile equipment. They also carry entertainment items that have historically done well during recessions, such as books and video games.
- Price – Last and most importantly, is that Amazon dominates because most products are sold at a discount to in-store prices. With discounts as deep as 30-50% not being uncommon on individual items, the average consumer can save a significant amount of money by doing most shopping online.
With all of these advantages, investing in the company does seem like a no-brainer, but there are a few reasons for caution. First is the fact that Amazon relies on shipping. With gas prices heading higher again and companies like UPS and FedEx losing business, dealing with increased shipping costs could most certainly eat into Amazon’s bottom line.
Second, with the average Price-to-Earnings (P/E) ratio historically hovering around 15, Amazon’s P/E ratio tracking today at just below 50 is certainly considered high. A higher P/E ratio is usually indicative of investors believing the company has large potential for future growth, but with the world economy shrinking quickly, the near future for most companies is revolving around survival, not growth.
To keep ahead of expectations in the coming year is going to be a tricky task for Amazon in a hostile business environment. Yet, as the 12 year anniversary of their IPO approaches in May, something tells me that this company that began with selling books should be up for the challenge.
For more information on the stock, headlines and to see their positive earnings report for last quarter click here.
Wal-Mart Stores, Inc. NYSE: WMT
McDonald’s Corporation NYSE: MCD