Small Business and Technology Focus
"Just as was the case in Costco's business ... AMZN will lever and experience a cycle of outsized equity returns," recently wrote Scott Devitt, an analyst at Stifel Nicolaus, which has no underwriting relationship with Amazon. "Amazon is singularly focused on one extremely important constituent -- ITS CUSTOMER -- and we believe that this attitude toward its business may be its most valuable hidden asset."
There is some recent evidence that the bulls are right about the customer focus. Amazon's critics often point out that big-name retailers such as Wal-Mart (WMT) are horning in on Amazon's online act. But while Wal-Mart's online presence is catching up to Amazon in pageviews, it's doing a terrible job of turning those views into purchases. According to data from Compete.com, Amazon saw 10.7 million transactions in December 2006, its busiest month, while Wal-Mart saw only 3 million. The year-on-year growth rate of Amazon's transactions, at 29%, also outpaced Wal-Mart's 21% growth rate. Wal-Mart was the second-busiest retailer in terms of online transactions, but it was a very distant second. Still, investors who have been hearing this optimistic argument for years would be justified in wondering just when the long-vaunted turnaround is going to happen. The answer, just possibly, may be right now. In 2006, Amazon spent heavily on technology to launch a downloadable video business and a new line of business that rents out its powerful back-end operations such as storage and programming. Both are potentially high-margin businesses, although to date the movie downloads haven't fared as well as the Web services. That investment squeezed margins last year, but Amazon vows the heaviest spending is over. In its most recent quarter, operating expenses and operating profit both showed a substantial improvement from the previous quarters. Operating expenses were 16.4% of revenue, the lowest figure in eight quarters.
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