On Feb. 5, we knocked the ball out of the park with our recommendation on Amazon.com Inc. (Nasdaq: AMZN). After getting pummeled by the worst recession since 1930, it’s heartening to see that at these valuations, and with the massive disequilibrium that’s affecting so many market sectors, we can rewarded much more than during normal times.
Amazon was trading at $61.15 a share when we recommended it, and rose about 30% in the nine weeks since. And I’m pretty certain that our investment in Amazon will continue to reward us with a steadily advancing profit.
Not only does the company continue to gain market share against its brick-and-mortar competitors, its innovation and superior strategic execution continues unabated.
Our reasons for buying Amazon stock back in February turned out to be right on target: Amazon did release the mysterious-but-rumored encore to its successful Kindle, known, appropriately, as the Kindle 2, just one week after we beat them to the punch on their own announcement right here in this column. And a large amount of other new and improved technologies have been hitting the market lately, from multi-terabyte storage memory devices, to enhanced iPods, laptops and PCs. A step-up in technology is bringing with it another wave of upgrade fever.
Amazon’s “cloud-computing” initiative continues to make major progress, as well. The impact of this technology – like most new successful technologies – has been grossly understated at the onset, but it promises to gain massive momentum.
The reality is that Amazon is turning out to be a much better profit play than I anticipated. In fact, after I wrote that article, I bought a Kindle 2 for my youngest daughter’s 11th birthday.
I had been looking for a way to appease my daughter’s voracious reading appetites. But I also wanted to try the novel device for myself, and save the long and highly inconvenient morning walk through the snow, rain or cold up and down my long driveway to pick up The Wall Street Journal and the Financial Times print editions. I also wanted to experiment with other foreign newspaper subscriptions like the Shanghai Times. And lastly, but very importantly, I wanted to see for myself just what the upside for this device actually was.
The experiment proved to be an immediate success. In short, I was blown away by the Kindle’s simplicity and powerful capabilities. It can hold more than 1,500 books, the definitions for words a reader might not know appear at the bottom of the page, and you can make notes and cut and paste sections of the onscreen content.
When parents and teachers across America find out about these capabilities, the Kindle’s sales are going to take off exponentially. These functionalities make reading a book much easier and more useful in this electronic form than in the “hard-copy” formatf. The device also proved to be much more attractive and addictive than I expected and it’s remarkably easy to use.
Critics point to the devices hefty price tag, but the low cost of electronic publications versus paperback or hard cover books – as well as the aforementioned technological advantages – offsets the high cost of the Kindle.
With the Kindle’s free Whispernet wireless Internet access, I was able to quickly purchase and download the complete works of Charles Dickens (more than 200 works) for less than $5, a Bible (Old and New Testament) for $2, and other works for as little as 75 cents each.
I went on to buy Adam Smith’s “The Wealth of Nations,” Sun Tzu’s “The Art of War” and Baron Von Clausewitz’ “On War” for a pittance. Just buying the more than 200 Dickens books in physical form would have cost well in excess of $1,000. And the whole exercise took less than five minutes. Such convenience and value in buying can be very dangerous to people’s budgets and conversely good for Amazon.
And you don’t have to carry that weight. A student could conceivably carry all his or her school or university textbooks in the 10-ounce Kindle. Imagine having every book you ever read or studied readily at hand.
What’s more is that every book you buy is not just stored in your Kindle, but also in your Amazon account – a true testament to the huge value of cloud computing. So, if you ever lost your Kindle, you could re-download your previous purchases into your new device. And should you max the memory capacity of your Kindle, you can just delete it from the device and it appears as “archived,” reminding you that you can re-download it from Amazon’s servers whenever you please.
Indeed, the Kindle is both unique revolutionary, and will be a huge success for Amazon.
So, ahead of the quarterly profits I would not dare to take profits in this stock. Sure, technology stocks have been on a tear, and Amazon is one of the leaders, but this is just the beginning.
We still have the bank stress tests ahead, the General Motors Corp. (NYSE: GM) and Chrysler LLC deadlines and the implementation of the Public-Private Investment Program (PPIP) government program to help ease the toxic asset problem at the banks, so nothing is certain. But I am optimistic about these three situations.
As we saw with Wells Fargo & Co. (NYSE: WFC), when you are borrowing at 0% interest and lending at 6% through 22% (lowest FICO score credit card loans), profits accumulate very fast and help resolve many problems.
I expect the PPIP program to be a resounding success, as well, Since it not only provides huge subsidized financing from the government, it moves much of the credit risk in those positions to them.
Finally, the Chrysler and GM situations – either through bankruptcy or voluntary reorganization – will eventually result in companies that can be great once more.
That brings us back to Amazon’s valuation. Amazon has continued to grow sales and profits in this recession and as the economy picks up, I can see momentum accelerating.
The first line of true resistance that Amazon stock should encounter is its all-time high. And if Amazon beats estimates when it releases its earnings on April 23, it will get there really fast. But even if it doesn’t get there as quickly as I expect, this is a stock to keep well stashed for years to come.
Recommendation: Buy Amazon.com Inc. (Nasdaq: AMZN) before Monday’s product announcement and ahead of the rollouts of the stimulus packages planned by both the United States and China (**).
(**) - Special Note of Disclosure: Horacio Marquez holds no interest in Amazon.com Inc.
News and Related Story Links:
- Money Morning:
Not Just a Price Floor, Treasury Programs May be a Stable Foundation for Economic Recovery