What’s the next step in growing your business when you’re an incredibly successful online retailer? If you’re Amazon.com (NASDAQ:AMZN) the answer is to branch out into technology development. The popular online store took one of its most successful businesses, peddling books, and went paperless — launching the popular Kindle e-reader that utilizes the company’s vast library of literature. But they didn’t stop there. Amazon is a force to be reckoned with, offering its customers access to web-based storage as well as digital entertainment in the form of games, television, movies and a growing list of offerings. But with a very pricey price to earnings ratio around 171, a stock price hovering at $208 and a litany of competitors, is Amazon’s stock worth picking up?
Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for a Stockʼs Movement – With it’s high profile ventures, Amazon seems to constantly be making news. Whether the topic at hand is a new partnership with a major firm, updated a Kindle device, or scaling a new cloud-based venture for developers, the company provides potential for price movement. In short, the company has a continuous product release cycle to prospectively push shares higher.
H = High Quality Product Pipeline for Future Good News – Where to begin? Amazon stands to benefit from its investment in technology in numerous ways. First, in the cloud Amazon.com leads the pack in cloud-based technology with its Amazon Web Services. This will help the company as mobile internet use expands. And unlike competitor Facebook Inc. (NASDAQ:FB), the company actually has a revenue model in place to take advantage of mobile devices.
Next up, the Kindle. While the Kindle Fire lags behind Apple Inc.’s (NASDAQ:AAPL) iPad in the tablet race, the Kindle is still king of the e-readers. Additionally, Amazon generates consistent revenue every time a Kindle user buys a book, movie, or game from Amazon.com. Finally, Amazon’s foray into a wider breath of entertainment options provides opportunities for new partnerships including a new venture that pairs Amazon and Microsoft Corp.’s (NASDAQ:MSFT) Xbox 360 via a new Amazon Instant Video app.
E = Debt to Equity Ratio Near 0 – Amazon’s debt has been increasing after several years on the decline thanks to the financing of multiple new operations and ventures. However, the company maintains a low long-term debt to equity ratio that is currently hovering around 0.18. This is the sign of a company with incredible strong operations supporting cash flow.
A = A-Level Management Runs the Company – Jeff Bezos has long been one of America’s favorite CEO’s. This understated billionaire and founder of Amazon.com has not only built a profitable company, he also embraced change in ways that have helped his company become more dynamic. Many praise Bezos’ long-term vision for the company, and so far, it’s worked. Since Bezos took the company public in 1997 it has returned over 12,000 percent to shareholders.
T = Trends Support the Industry in which the Company Operates – While people have proclaimed the death of physical books, digital entertainment is not going anywhere. Amazon is firing on all cylinders when it comes to engaging users in the field of digital books, movies, television, and the cloud. The company is constantly expanding and improving the methods through which it delivers content to customers and stands poised to rival technology juggernauts Apple and Google Inc. (NASDAQ:GOOG).
Amazon.com has many faithful followers who believe the company’s commitment to innovation and long-term vision will pay off for investors in the future as it has in the past. Historically, the company has outperformed both the S&P and many of its industry peers. However, while revenues have grown, so have expenses as the company builds out its technological infrastructure. As expenses eat into profits, the company’s price to earnings ratio has soared. The median price target for the stock is currently $255, which gives Amazon a roughly 19 percent upside. For many, increasing expenses are simply the price you pay for the innovation and expansion needed to run a company as successful as Amazon. And Amazon went through this investment cycle once before only to emerge as the Wal-Mart (NYSE:WMT) of the internet.
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