2 Reasons to Buy Amazon.com and 1 to Sell
May 12th 2013 12:00PM
Updated May 12th 2013 7:50PM
Investors sold off shares of Amazon.com after the company announced earnings results for first quarter of the year. Is this an opportunity for long-term investors to grab a stake in this growing business or head for the exits with the rest? Read on, and I'll outline two of the best reasons to add Amazon to your portfolio and one reason to sell.
Buy reason No. 1: Amazon's Prime service
Amazon Prime members pay Amazon $79 a year for unlimited two-day shipping on most products. And the service is a hit -- making Amazon the go-to destination for millions of new customers, with no end to the breadth of products that can be shipped to them from its growing base of warehouses.
While the company doesn't share member numbers, independent estimates peg subscribers at 10 million -- and rising fast.
Taking a page from Costco's successful retail model, Amazon engineered its Prime service to promote deep levels of customer engagement while padding the company's bottom line. Once shoppers are in, they're hooked. As members, they tend to look to Amazon to fill a wider range of product needs, from batteries to baby clothes. And Prime members are heavy users, too. They spend on average $1,224per year on the site, or double what non-Prime customers spend.
Amazon's main challenge here is to keep these members happy -- and to attract new ones -- mostly by boosting the number of products it offers with the addictive bonus of unlimited free, and fast, shipping.
Buy reason No. 2: CEO Jeff Bezos
Bezos is that rare founder/CEO who is completely focused on changing the world by delighting his customers. He's been called one of the best chief executives of modern business -- in the same league as Apple's Steve Jobs.
It's not just the fact that Bezos has delivered shareholder returns of 12,266% while boosting the value of his company by more than $100 billion. He also brings a rare mind-set to the business. As he explained in an interview recently, "Inventing and pioneering involves a willingness to be misunderstood for long periods of time."
One downside to that willingness is that Bezos and his management team don't share much information about their plans, or business, with investors. Kindle sales numbers, Prime subscriber figures, and online content spending are just three of the many data points that shareholders have to guess about, as management doesn't disclose them. For whatever reasons, Amazon keeps Apple-like secrecy not just on future products, but also on the success of current ones.
Still, there's no question that Bezos' financial interests are perfectly aligned with investors'. After all, he owns 88million shares in Amazon, accounting for nearly 20% of the entire company.
Sell reason: Valuation
Amazon is just not cheap. At $120 billion, the company is valued at twice last year's sales revenue. That premium is four times the valuation of even the most successful traditional retailers like Costco. And with a sky-high P/E ratio, the e-tailer will have to execute at an extraordinary level for years to justify that premium valuation.
While Amazon is already years into a big growth cycle, there are good reasons to believe the company can continue to expand from here.
Everyone knows Amazon is the king of the retail world right now, but at its sky-high valuation, most investors are worried it's the company's share price that will get knocked down instead of its competitors'. The Motley Fool's premium report will tell you what's driving the company's growth, and fill you in on reasons to buy and reasons to sell Amazon. The report also has you covered with a full year of free analyst updates to keep you informed as the company's story changes, so click here now to read more.
The article 2 Reasons to Buy Amazon.com and 1 to Sell originally appeared on Fool.com.Fool contributor Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Amazon.com. 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.
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