The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, and we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing the pioneer of online retailing, Amazon.com (NAS: AMZN) .

Amazon.com by the numbers
Amazon is a high-growth Internet-based business. Here are some of its most recent growth and value metrics to better acquaint you with the company.

Statistic

Result (Most Recent Available)

Revenue $48 billion
Net Income $631 million
Profit Margin 1.3%
Market Cap $93.5 billion
Forward P/E 73.8
10-Year Revenue CAGR 28.5%
Key Competitors Wal-Mart (NYS: WMT)
Apple (NAS: AAPL)
Netflix (NAS: NFLX)
Barnes & Noble (NYS: BKS)

Sources: Amazon.com Q4 earnings press release, Morningstar, and author's calculations.

Sean's take
I need you to all sit down, because The Motley Fool's Grinch actually likes something. Amazon has everything I'm looking for in a high-growth, market share-stealing Internet-based business. What's to like about Amazon is that it has moved far beyond just online commerce.

For starters, Amazon, with the help of Netflix's self-destructing CEO, Reed Hastings, is firmly stealing market share from Netflix in online movie streaming. Amazon kicked off its online streaming business in February 2011 and, with the purchase of Lovefilm, an online video rental service, in the U.K. last year, looks to continue to push Netflix's once staunch boundaries. With Amazon's far superior cash position, I also give it an edge when it comes time for these two companies to renegotiate their content contracts.

Amazon has also transformed the way people buy everything from books to appliances by using the K.I.S.S. system: Keep It Simple, Stupid! With the introduction of the Kindle, and now the Kindle Fire, its customers have the ability to download books, eliminating the hassle of shipping or even driving to the nearest Barnes & Noble.

Another way to think about Amazon is as a burgeoning cloud play. Its EC2 (Elastic Compute Cloud), virtual data center, and S3 storage farm -- which allow users to simply pay for what they use rather than rely on contracts -- are the models by which other cloud companies have based themselves upon.

You get it all with Amazon: online streaming, the cloud, and consumer retailing. I like it!

Travis' take
I love the concept Amazon brings to the table with online sales, tablet computing, and streaming video. They're all sexy businesses that sound great when you are trying to sell the "story" of this stock. But Amazon's business is fundamentally built on being the low-cost supplier in a number of low-margin businesses, not a position I like.

The online retail business is Amazon's bread and butter, and the company has competition from an almost infinite number of sources, with more popping up every day. Tablets are being sold at a loss just to gain market share, something industry leader Apple would never do. And while Amazon may be able to make inroads in streaming, as Sean suggests, Netflix has shown that profits are strong only when you're growing like a weed. Eventually the content providers are going to squeeze most of the value out of that business, not Amazon.

Worst of all is the price you have to pay to buy Amazon's stock. The company is trading at 150 times earnings right now and 73.8 times forward estimates. The company has also missed estimates by a wide margin in two of the past four quarters, and analysts have been lowering future estimates dramatically over the past three months.

The stock's current value prices in an incredible amount of profit growth, a huge risk in my eyes. Netflix proved that when a stock gets ahead of itself, the crash can be fast and furious. I see too many similar warning signs from Amazon for me to call it a buy, and I'll even predict that this will be an underperformer for the next few years.

Alex's take
I love Amazon ... as a place to shop. As an investment, I'm not so sure. Sean pointed out a number of pies that Jeff Bezos has his fingers in, but being the king of all online sales formats means nothing without the profits to back it up:

anImage

Amazon.com Revenues Chart by YCharts

Isn't creating a new paradigm supposed to be profitable? Shouldn't popularizing three (online retail, e-books, and cloud computing) be worth more than profit margins that hover in big-box retail territory?

anImage

Amazon.com Profit Margin Chart by YCharts

I understand that Amazon's strategy is a long-term one. The Kindle Fire is a way to get consumers to buy more Amazon goodies. For less than the price of a year's subscription to Netflix, Amazon will give you streaming video, a free e-book per month, free two-day shipping on everything you buy, and possibly a free puppy if you ask nicely. But the Kindle is sold at a loss, and Prime hasn't helped Amazon's shipping costs at all -- they've been rising for at least two years.

Contrast that with Apple, which makes very healthy profits on each iDevice sold. Any content sales are just icing on the cake. We've yet to see the Fire play out on a long enough timeline to evaluate its impact, but both Apple and Barnes & Noble executives seemed rather unconcerned in recent earnings calls about the threat.

Can Amazon bring its margins up? Its P/E is 10 times as high as both Wal-Mart and Target, but its margins have actually gotten worse than its big-box retail competitors. For more than a decade, Amazon investors have watched the company wrap its tendrils around more industries and salivated at the possibility of greater profits, to no avail. That hasn't stopped the stock from rising, but at this point I want to see more than expansion and potential. I want bottom-line results, not efforts to sell dimes for a nickel while making it up in volume. Until that happens, Amazon is too much of a gamble for my liking.

The final call
I (Sean here) can officially chalk up another week of being the dissenter of the group! Although points could be made for Amazon's wide array of growth, its frothy valuation and lack of delivering results where it counts given the ample time it has had to do so overrule my bullishness and allows us to collectively make a CAPScall of underperform on the stock.

Amazon.com may not wet our whistle, but this top stock in Latin America sure has our chief investment officer excited. Find out the name of this stock for free!

At the time this article was published Fool contributor Travis Hoium owns shares of Apple through an account that he manages. Fool contributors Sean Williams and Alex Planes hold no financial position in any company mentioned here. You can follow Alex on Twitter at @TMFBiggles, Travis at @FlushDrawFool, and Sean at @TMFUltraLong. We encourage you to follow our picks at TMFYoungGuns.The Motley Fool owns shares of Amazon.com, Apple, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Amazon.com, Apple, Netflix, and Wal-Mart, as well as creating a bull call spread in Apple, writing puts on Barnes & Noble, and creating a diagonal call position on Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that everyone can agree on.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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